Ignorance Is Bliss: Must a party actually know it has termination rights to elect to waive them?

3 December 2024

In URE Energy Limited v Notting Hill Genesis [2024] EWHC 2537 (Comm), the Commercial Court (Mrs Justice Dias) held that URE had not elected to waive its contractual right to terminate an electricity supply contract despite it continuing to perform the contract for some eight months after the right arose. That outcome may seem counterintuitive, but it arose from both parties' ignorance of key contractual provisions. The case highlights some interesting lessons for parties involved in troubled projects that are purported to be terminated opportunistically on grounds unrelated to the issues in dispute.

Background

URE and Genesis Housing Association ("GHA") entered into an agreement in 2017, whereby URE would supply electricity and make energy saving upgrades to GHA's estates (the "Agreement"). It was common ground that the Agreement was intended to be a stepping-stone to a long-term green energy PPA, which would help URE finance a dedicated solar farm.

The Agreement contained two relevant grounds for termination:

Clause 10.2(b) of the Agreement allowed URE to terminate if "the Customer commits a material breach of this Contract […] and where such breach is capable of remedy, fails to remedy such breach within 10 days of the Supplier giving the Customer notice of such breach and requiring the Customer to remedy such breach."
Clause 10.2(d) of the Agreement allowed URE to terminate the Agreement if GHA "passes a resolution for its winding up which shall include amalgamation, reconstruction, reorganisation, administration, dissolution, liquidation, merger or consolidation (other than a solvent amalgamation, reorganisation, merger or consolidation approved in advance by the Supplier)."

In April 2018, GHA amalgamated with another entity to become NHG. URE was given notice but its consent was not sought and, indeed, URE was assured the amalgamation would have no impact as regards the operation of the Agreement.

In this period, URE started to struggle to complete the upgrade works required under the Agreement because of alleged failings of NHG's site managers. In the months following the amalgamation, the relationship between URE and NHG deteriorated severely and by the end of October, NHG had made it clear to URE that the long-term PPA was off the table. URE decided to terminate the contract.
URE initially purported to terminate pursuant to Clause 10.2(b) for material breach arising from NHG impeding its works. However, the notice failed to provide for the cure period required by Clause 10.2(b). URE therefore revoked the termination notice and, in November, filed a second termination notice that now also invoked Clause 10.2(d).

NHG argued, amongst other things, that URE had elected to waive its right to terminate the Agreement and/or was estopped from exercising its right to do so under Clause 10.2(d), considering it had continued to perform its obligations under the Agreement for months after the amalgamation. NHG also argued that URE's terminations constituted repudiatory breaches.

The Decision

Waiver by Estoppel

URE successfully applied for the estoppel defence to be struck out on the basis that NHG had no prospect of establishing detrimental reliance.

Waiver by Election

The Court referred to the key principles established in The Kanchenjunga [1990] 1 Lloyd’s Rep. 370 and Peyman v Lanjani [1985] Ch. 457. In summary:

if a party becomes entitled to terminate a contract, it must elect whether or not to exercise that right by words or by conduct (and where the party is abandoning a right it would otherwise have, clearly and unequivocally); and
that party must be aware of the facts giving rise to the right, as well as the right itself.

The Court considered this second limb first. Although it was NHG's burden to prove that URE had the requisite knowledge, URE took the bold step of waiving legal privilege over all of the advice it had received from its lawyers to demonstrate that it had not been advised on implications of the amalgamation until November 2018. The Court scrutinised that file in very considerable detail and agreed with URE.

The Court distinguished between knowing that a clause exists versus actually understanding what it means or how it applies. The knowledge required by URE was subjective - knowing that a termination provision existed in the boilerplate did not suffice. URE could not elect to waive a right it did not know it had.

"No Waiver" Clauses

The Court reached this conclusion notwithstanding Clause 13.1 ("No delay or omission by either party in exercising any right, […] shall be construed as a waiver of such right, power or remedy […]"). Though this issue did not strictly arise, the Judge proceeded to consider if this language would have been effective in preventing a determination of waiver, in the hypothetical where URE knew it had the right to terminate the Agreement.

Referring to MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24, the Judge noted that courts will generally enforce an entire agreement clause and that, though a party may be estopped from relying on it, the fact the clause exists raises the threshold for finding of an estoppel. The Judge considered that the same reasoning must apply to "no waiver" provisions and Clause 13.1 was construed accordingly – "the clause must be taken into account in determining whether the conduct relied upon is sufficient to constitute waiver, or whether it is no more than mere delay."

URE argued that context was key; and that, due to its regulatory obligations, URE could not simply stop performing under the Agreement. However, after the amalgamation, URE required NHG to perform the Agreement. It also continued to participate in the negotiations for the PPA. The Judge decided that this conduct constituted more than mere "delay or omission" and that, if URE had been aware of its right to terminate the Agreement under Clause 10.2(d), Clause 13.1 would not have been effective in preventing her from finding that such a right had been waived.

Repudiation

NHG's repudiation arguments failed as:

while the first termination notice was defective, URE revoked it before NHG had accepted any repudiation;
the revocation letter was not repudiatory because it cured the first notice; and
the second termination notice was not repudiatory since the Court had found that URE was entitled to terminate under Clause 10.2(d).

Comment

The result may be considered surprising given the time that elapsed. However, the right was (arguably) obscure and the buyer received considerable value in the period of continued performance. The judgment highlights why it is important that key members of any organisation involved in major projects have a clear understanding of key terms in contracts, such as termination grounds, in case they are accidentally triggered.

Furthermore, the claimant likely prevailed in this case because of the decision to waive legal professional privilege. As a company reliant on a single contract, it probably had little to lose in doing so. On a larger project with a more complex fact pattern, this is unlikely to be an option. Moreover, it would be prudent to assume that a large corporate enterprise, particularly with an in-house legal team, is unlikely to be able to successfully claim ignorance of the effect of the key clauses in its contracts in the same way as URE. The case also shows that "no waiver" clauses may also be of limited assistance where there has been ongoing and active performance of a contract and engagement in the wider contractual relationship.

Finally, while the defendant's repudiation defences also survived because of URE's swift revocation of the defective notices, the judgment is a salutary reminder that any party considering termination should take comprehensive legal advice before issuing any notice.