contract-law
Termination by convenience clauses
<p>Will a termination by convenience clause always be honored by the court, if it is used in a manner that is completely unethical? Eg. can a company terminate an account that just bought an expensive subscription without refunding said subscription?</p>

<p>Edit: can someone actually tell me whether this runs afoul of a tenet of contract law?</p>

<h2>Unadulterated contract law is brutal</h2>

<p>Nor is it the same in every jurisdiction - I will focus on <a href="/questions/tagged/australia" class="post-tag" title="show questions tagged &#39;australia&#39;" rel="tag">australia</a>.</p>

<p>The central tenant of contract law is that the parties are free to agree anything that is legal irrespective of whether this leads to what may seem to be a harsh or unjust outcome to an outside observer (or the parties themselves). At common law, harsh and unjust terms are legal - only <a href="https://en.wikipedia.org/wiki/Unconscionability#Australian_case_law" rel="nofollow noreferrer">unconscionability</a> attracts legal protection. However, see below.</p>

<p>The parties have an obligation to follow the terms of the contract in a way that gives effect to the purpose of the contract and to not act in bad faith - there is no obligation to act in good faith. Notwithstanding, a party that scrupulously follows the terms of a contract cannot be acting in bad faith - they are doing what they agreed to do.</p>

<p>That said, most “termination for convenience” clauses are, by their nature, discretionary. Where a party has a discretionary power under a contract they must exercise it reasonably. This doesn’t mean that they can’t exercise the power if it causes damage to the other party but, if it does, then that is  a factor in whether the action was reasonable.</p>

<p>If the action was reasonable then only rights and obligations up to the date of termination are enforceable at common law. So, in your circumstance the customer is <strong>not</strong> entitled to a refund.</p>

<h2>However, ...</h2>

<p>Many contracts are not made purely at common law and statute law has knocked some of the harsh edges off.</p>

<p>For example, this contract may be subject to <a href="https://consumerlaw.gov.au/australian-consumer-law/legislation" rel="nofollow noreferrer">Australian Consumer Law</a> (ACL). </p>

<blockquote>
  <p>For the purposes of the ACL, a person is a 'consumer' if they acquire goods or services that are priced at less than $40,000. A person is also a 'consumer' if they acquire good or services that are priced at more than $40,000 but they are 'of a kind ordinarily acquired for personal, domestic or household use or consumption'.</p>
</blockquote>

<p>If your “expensive subscription” is less than $40,000 then ACL applies and you are entitled to a refund for the services not provided.</p>

<p>Further, if the vendor engaged in “misleading or deceptive conduct” (irrespective of if you are a consumer) then the contract can be set aside and you get your money back.</p>

<p>If the contract is a “consumer contract” (which includes most “take it or leave it” contracts with individuals and small and medium enterprises) then a term is unlawful if it is unfair rather than unconscionable.</p>

<p>Many U.S. states recognize a <strong>duty of good faith and fair dealing</strong> that may not be waived and is part of every contract.</p>
<p>In Colorado, this duty applies to the manner in which a party to a contract with discretionary rights under a contract is required to exercise those rights. This must be done in a manner consistent with the mutual intent of the parties in entering into the contract. It is implied as a matter of law in all contract and even sophisticated parties (e.g. big oil companies in business to business transactions) can't waive it.</p>
<p>Colorado's leading case on the topic is <em>Amoco Oil Co. v. Ervin</em>, <em>908 P.2d 493</em> (Colo. 1995) which spells out the doctrine at length:</p>
<blockquote>
<p>Colorado, like the majority of jurisdictions, recognizes that every
contract contains an implied duty of good faith and fair dealing. §
4-1-203, 2 C.R.S. (1992) (&quot;Every contract or duty within this title
imposes an obligation of good faith in its performance or
enforcement.&quot;); <em>see, e.g., Wells Fargo Realty Advisors Funding, Inc.
v. Uioli, Inc</em>., 872 P.2d 1359, 1362 (Colo.App.1994); <em>Friedman v.
Colorado Nat'l Bank</em>, 825 P.2d 1033, 1042 (Colo.App.1991), rev'd on
other grounds, 846 P.2d 159 (Colo.1993); <em>Ruff v. Yuma County Transp.
Co</em>., 690 P.2d 1296, 1298 (Colo.App. 1984); <em>see also Larese v.
Creamland Dairies, Inc</em>., 767 F.2d 716, 717 (10th Cir.1985)
(explaining that the franchisor-franchisee relationship is one that
requires the parties to deal with one another in good faith and in a
commercially reasonable manner); see generally Restatement (Second) of
Contracts § 205 (1981); 3 Arthur Linton Corbin, Corbin on Contracts §
561, at 278 n. 2 (1960); Steven J. Burton, Breach of Contract and the
Common Law Duty to Perform in Good Faith, 94 Harv.L.Rev. 369, 369
(1980) [hereinafter Burton I].</p>
<p>The good faith performance doctrine is generally used to effectuate
the intentions of the parties or to honor their reasonable
expectations. <em>See State Farm Mut. Auto. Ins. Co. v. Nissen</em>, 851 P.2d
165, 168 (Colo. 1993); <em>Davis v. M.L.G. Corp</em>., 712 P.2d 985, 989
(Colo.1986); Steven J. Burton, More on Good Faith Performance of a
Contract: A Reply to Professor Summers, 69 Iowa L.Rev. 497, 499 (1984)
[hereinafter Burton II]. Good faith performance of a contract involves
&quot;faithfulness to an agreed common purpose and consistency with the
justified expectations of the other party.&quot; <em>Wells Fargo</em>, 872 P.2d at
1363 (citing Restatement (Second) of Contracts § 205 cmt. a (1981)).
The application of the reasonable expectations doctrine often &quot;fails
to give effect to some hornbook rules governing the construction of
contracts,&quot; including &quot;the precept that contracts which are free from
ambiguity are to be enforced as written....&quot; <em>Davis</em>, 712 P.2d at 990
&amp; n. 7. Nonetheless, adherence to this principle promotes &quot;the central
policy underlying contract law, that of construing contracts so as to
effectuate the parties' intentions....&quot; <em>Id</em>. at 991; <em>see also State
Farm</em>, 851 P.2d at 166-67; <em>Simon v. Shelter Gen. Ins. Co</em>., 842 P.2d
236, 240 (Colo.1992).</p>
<p>The duty of good faith and fair dealing applies when one party has
discretionary authority to determine certain terms of the contract,
such as quantity, price, or time. <em>Hubbard Chevrolet Co. v. General
Motors Corp</em>., 873 F.2d 873, 876 (5th Cir.), cert. denied, 493 U.S.
978, 110 S. Ct. 506, 107 L. Ed. 2d 508 (1989); <em>Burton II</em>, <em>supra</em>,
at 501. The covenant may be relied upon only when the manner of
performance under a specific contract term allows for discretion on
the part of either party. <em>See Hubbard Chevrolet Co</em>., 873 F.2d at
877. However, it will not contradict terms or conditions for which a party has bargained. <em>Id</em>.</p>
<p>The concept of discretion in performance &quot;refers to one party's power
after contract formation to set or control the terms of performance.&quot;
Burton II, supra, at 501. Discretion occurs when the parties, at
formation, defer a decision regarding performance terms of the
contract. Id. Generally, the good faith performance doctrine may be
used to protect a &quot;weaker&quot; party from a &quot;stronger&quot; party. Weakness and
strength in this context, however, do not refer to the relative
bargaining power of the parties. One commentor explained:</p>
<p>&quot;Good faith performance cases typically involve arm's-length
transactions, often between sophisticated business persons. The
relative strength of the party exercising *499 discretion typically
arises from an agreement of the parties to confer control of a
contract term on that party. The dependent party then is left to the
good faith of the party in control.&quot;</p>
<p>Burton I, <em>supra</em>, at 383-84.</p>
</blockquote>
<p>A right to terminate a contract for convenience is a discretionary right under a contract that is nominally absolute. But, if that right were exercised in a manner calculated to harm the other party to the contract rather than primarily to allow a party to end a contractual relationship that had become burdensome or undesirable, that might breach the implied duty of good faith and fair dealing in the contract.</p>

<p>In general, one party may cancel a contract for any reason which is provided for in the contract, and does not violate any current law. However, if such a contract is brought before a court which includes equity jurisdiction (as most common law courts now do), the court might well object to the terminating party obtainign an <em><strong>unjust enrichment</strong></em> as by collecting the prove for a service, but never providing th service nor a refund. Such a court might well order a refund of the unearned price, unless some other factor justified the termination.</p>
<p>Additionally, if the transaction is considered a <em><strong>consumer transaction</strong></em> under local law, consumer protection laws may regulate the transaction, and prohibit a cancellation without refund. The scope and provisions of such laws vary widely between jurisdictions, so one might or might not apply in any particular ase..</p>
