Terminating a contract: waivers and requisite knowledge

In URE Energy Limited v Notting Hill Genesis [2024] EWHC 2537 (Comm), the Court held that the Claimant, an energy company, had not waived its right to terminate an electricity supply contract following an amalgamation at the customer despite its continued performance for six months after the termination event, as it did not have the requisite knowledge of its right to terminate.

The decision is a reminder of the importance of understanding the termination rights under a contract and ensuring that these are not inadvertently waived.

Background

The Claimant entered into a 4-year energy supply contract with a customer (the “Contract”). The Contract included a provision which allowed the Claimant to terminate if the customer “passed a resolution for its winding up which shall include amalgamation… (other than a solvent amalgamation… approved in advance by the Supplier)”.

In April 2018, the customer amalgamated with another entity to form the Defendant. The customer notified the Claimant of the amalgamation in advance, but did not seek the Claimant’s approval. In the subsequent months, the relationship between the parties deteriorated. However, the Claimant continued to perform its obligations under the Contract until November 2018, when it was notified by its solicitors of its right to terminate as a result of the amalgamation (after taking legal advice on a prior defective termination notice, which did not refer to the amalgamation).

The Claimant’s solicitors gave notice to terminate and issued proceedings against the Defendant. The Claimant’s primary case was that the amalgamation in April 2018 gave rise to the right to terminate and that upon termination, the Claimant became entitled to a termination payment for loss of profits amounting to nearly £4m (the “Amalgamation Claim”). In response to this claim, the Defendant submitted that the Claimant had waived its right to terminate by election by continued performance of the Contract.

Decision

Right to terminate

In deciding the Amalgamation Claim, the Judge confirmed the following principles applicable to waiver of termination rights:

1. Where a party (A) becomes entitled to terminate a contract, it must elect whether to exercise that right or not.
2. In order to make that election, A must be aware both of the facts giving rise to the right to terminate and of the right itself.
3. A must actually make a decision. If it does not, the time may come when an election is deemed to have been made regardless.
4. If, with the requisite knowledge set out in ii) above, A acts in a manner which is consistent only with either terminating or continuing, it will be held to have elected accordingly.
5. An election can be made by any words or conduct which communicates an intention to choose one or other course of action but, particularly where A has elected to abandon a right which it would otherwise possess, such election must be communicated in clear and unequivocal terms.

Knowledge

The Judge found that, while the Claimant was aware the amalgamation had taken place and was generally aware that the Contract contained a termination clause, it was unaware that the right to terminate was triggered by the circumstances of the amalgamation (i.e. the absence of the Claimant’s approval). In considering the facts, the Judge held that the controlling mind of the Claimant focused on the commercial and financial terms of the Contract and took the termination clause merely as “boilerplate” provisions and did not appreciate its complexity, which was found to be plausible for a lay businessman.

The Defendant asserted that, as the Claimant was in receipt of legal advice, there was a presumption that the Claimant was aware of its termination right. In response, the Claimant waived privilege in its legal advice and submitted evidence to rebut this presumption. The Judge found there were no detailed discussions between the Claimant and its lawyers of the Contract on a clause-by-clause basis and the Claimant was not advised on the application of the amalgamation termination provision (whether before or after the Contract was signed). Therefore, it could not be inferred that the Claimant was aware of its right to terminate the Contract as a result of the amalgamation.

Continued performance

The Judge considered whether the Claimant waived its right to terminate through continued performance following the amalgamation, by supplying electricity, issuing monthly invoices, and positively insisting on the Defendant’s performance of the Contract. The Judge noted that in light of the finding that the Claimant did not have the requisite knowledge of its termination right, this question did not strictly arise. However, it is worth noting that obiter, the Judge commented that had the Claimant known of its right to terminate following the amalgamation, this conduct without a reservation of rights would have been a powerful indication it was affirming the Contract and would amount to a waiver – even though the Contract provided a right to terminate “at any time”.

Lapse of time

Lastly, in considering the Amalgamation Claim, the Court considered whether the Claimant was deemed to have continued with the Contract through the lapse of time. The Judge held that a mere lapse of time, regardless of its length, was not a positive election to waive a termination right without a further positive act of performance.

Key takeaways

The decision highlights the importance of requisite knowledge before termination rights are waived – both of the facts giving rise to the right to terminate and of the right itself. While knowledge can be presumed where a party has sought legal advice, this can be rebutted by submitting evidence to show the contrary, which in this case involved the Claimant taking the unusual step of waiving privilege over its legal advice.

Whilst the facts of this case are unusual, this judgment serves as a useful reminder that when faced with a possible termination event, a party should carefully consider its termination rights under the contract. If the non-defaulting party decides to terminate, it should properly consider its approach to termination and the potential consequences. However, to avoid being deemed to have waived a termination right through continued performance, it is usually prudent to send an express reservation of rights whilst advice is taken.

The decision also demonstrates the importance of drafting clear termination clauses and ensuring parties are aware of their contractual rights and obligations. The cost of getting this wrong could result in exposure to risk, a claim for loss of profits (among other claims) and other contractual consequences, as seen in this case.

The decision has recently been granted permission to appeal.

With thanks to Priscilla Deodat for her assistance in preparing this post.