Bristows' SnippITs: When ignorance is bliss for termination rights

This post is the latest in Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond. 

The recent Court of Appeal decision in URE Energy Ltd v Notting Hill Genesis provides some useful lessons for parties facing termination events, including how their right to terminate can be waived.

Key takeaways

Make an election or lose the right: once a termination right arises for a party and they are aware of this, the party who has that right must decide whether it in fact wishes to terminate and act accordingly. The positive action of carrying on with contract performance is likely to result in a waiver of the right to terminate (irrespective of a boilerplate non-waiver clause).

Consider all termination triggers: for a party seeking to terminate a contract, such as a customer faced with unsatisfactory performance by its supplier, it is important to consider all potential termination triggers before drafting the termination notice. Some termination rights carry less risk than others (e.g. termination for convenience). Equally, additional termination triggers may be engaged which are unconnected with the reason for wanting to end the contractual relationship. In this case, the court found that URE “seized upon” the merger clause as a way to “justify” its termination and secure a termination payment. It was nonetheless able to validly terminate on these grounds. 

Waiver can only happen if the party knows about its right: there is no rule of law that a party is deemed to know the express terms of its contract. Although there is a presumption that parties who seek legal advice understand their rights, this is rebuttable. It is important for suppliers to be aware of this when faced with customers not acting upon certain contractual rights, including any right of termination. This will be of particular relevance where the termination trigger may be unusual in nature or there is some other reason it would not be immediately known to the customer (in this case, the termination right arose as a result of a solvent merger when no prior consent was given). If a party only subsequently becomes aware of the right to terminate, this can result in a significant delay (of months of more) in operating the termination provision.

Can drafting help? The court suggested that one way to protect against the outcome of this case would be to make termination rights subject to a defined time limit. It is therefore prudent to make termination triggers for events such as a change of control time-boxed e.g. 6 months from the date the party was notified or when the merger was made public.

Background

The dispute was between housing association Notting Hill Genesis (previously Genesis) and URE Energy, a start-up company, which had been set up specifically to supply electricity to Genesis. The parties entered into a four-year electricity supply contract as a short-term “placeholder” agreement pending negotiations for a more comprehensive 25-year deal. 

The initial contract included a right for URE to terminate in the event of a Genesis “amalgamation” (including a solvent merger) if it had not approved this in advance (the amalgamation clause).

Genesis subsequently merged with another housing association to form Notting Hill Genesis (NHG), which assumed the contract. NHG sent URE a notice of the merger explaining it was business as usual as far as the contract was concerned. URE raised no objection and both parties continued to perform under the contract. Months later, the relationship between the parties started to break down. NHG said it would no longer make payments in advance, leading to cash-flow issues for URE. NHG then gave written notice that it no longer intended to proceed with the long-term contract. As NHG was URE’s only customer, this had a devastating impact on its business.

At this point, URE sought legal advice and issued NHG with a notice of material breach of the initial contract (relying on URE’s failure to provide site access), giving NHG the contractual period of 10 days to remedy. 

Days later, after a further call with its solicitors, URE was advised that it had the right to terminate immediately for breach of the amalgamation clause and therefore served a termination notice to this effect.

Issues considered by the courts

NHG claimed that URE’s termination was not effective for a number of reasons, including:

1. URE had approved the merger in advance for the purpose of the amalgamation clause.

2. URE was estopped from terminating as a result of its continued performance of the contract following the notice of the merger.

3. URE had waived its right to terminate by electing to continue to perform the contract following the notice of the merger (waiver by election).

During a summary judgment application, the court rejected grounds 1) and 2). URE had not approved the merger on the facts and NHG had not relied on URE’s actions to its detriment, meaning estoppel could not arise. This left NHG’s argument on waiver by election.

Court of Appeal decision

The Court of Appeal upheld the first-instance decision that URE had not waived its right to terminate the contract as a result of the merger. URE could not have made an election to either affirm or terminate the contract until it knew both: (i) the facts giving rise to the right (i.e. that the merger had taken place) and (ii) the right itself (i.e. that the amalgamation clause allowed it to terminate).

By waiving privilege in its solicitor communications, URE demonstrated that it did not know of its rights under the amalgamation clause until the further call with its solicitors. It then acted swiftly on this information and terminated the contract.

NHG argued that as a matter of law, a party must be deemed to have knowledge of the express terms of a contract to which it had agreed. The Court of Appeal did not agree with this – what mattered was what the party actually knew. In a large contract with detailed provisions, it was “unrealistic” to expect the parties to carry all the terms in their heads. Although there is a presumption that a party who receives legal advice is aware of its contractual rights, that presumption is rebuttable and URE had successfully rebutted it.

Consequently, there was no waiver by election, so URE had validly terminated the contract.

The contract also included a non-waiver clause specifying that no delay or omission by either party in exercising a right would be construed as a waiver of that right. The Court of Appeal commented that if URE had knowledge of the amalgamation clause, the non-waiver clause would not have saved URE from affirming the contract through its positive conduct, which went beyond the mere lapse of time. 

Comment

The Court of Appeal agreed that its application of the law had led to a seemingly “counter-intuitive, and indeed unmeritorious” result in this case. However, there were a number of mitigating safeguards which would usually prevent such a result:

• The presumption of knowledge when legal advice is obtained (in this case, that presumption had been successfully rebutted);
• The ability to impose time limits on termination rights in a contract (in this case, no such time limit existed); and
• The doctrine of estoppel can often step in to provide a just result even when there was no relevant knowledge (in this case, the court had already found there was no detrimental reliance by NHG, so no estoppel arose).