English Court of Appeal: Awareness Is Necessary to Waive Contractual Termination Rights
The English Court of Appeal’s judgment in Ure Energy makes an important contribution to the law of waiver.
By Nell Perks and Anna Kullmann
Key Points:
- Ure Energy confirms that the principle in Peyman v. Lanjani applies in cases of express contractual termination rights.
- For a party to affirm a contract and waive its contractual right to terminate, it must actually know of the facts giving rise to its right to terminate, and the existence of that right.
Introduction
The English Court of Appeal’s recent judgment in Ure Energy Limited v. Notting Hill Genesis makes an important contribution to the law of waiver.1 It clarifies that the principle in Peyman v. Lanjani2 — that a party is not to be taken to have affirmed a contract and waived its rights to terminate unless it knows of both the facts giving rise to the right to terminate and the existence of that right — applies in cases of express contractual termination rights as well as at common law.
Background
In October 2017, Ure Energy Limited (Ure) entered into a four-year contract to supply energy to Genesis Housing Organisation (Genesis). The contract provided Ure with the right to terminate in the event of (among other things): (i) a material breach of the contract by Genesis or (ii) Genesis’ amalgamation with another entity without Ure’s prior approval. The contract stipulated that if Ure terminated the agreement, Genesis would pay Ure 50% of the then‑remaining contract value.
In March 2018, Genesis notified Ure of its intention to amalgamate with Notting Hill Housing Trust (Notting Hill) to form a new entity, Notting Hill Genesis (NHG). Ure was not asked to (and did not explicitly) consent to this amalgamation. The amalgamation was formally registered in April 2018. Ure raised no objection to the amalgamation and continued to supply energy to the new NHG entity.
For various reasons, the relationship between Ure and NHG deteriorated, and in October 2018, Ure notified NHG that it intended to terminate the contract on the basis of material breaches by NHG unconnected with the amalgamation.
On 5 November 2018, Ure was informed by its solicitors that it may be entitled to terminate the contract based on Genesis’ amalgamation with Notting Hill. Ure then revoked its initial notification, and on 7 November 2018, it issued a second termination letter, this time terminating the contract on the basis that Genesis had undertaken an amalgamation without Ure’s consent. Ure also claimed a termination payment of nearly £4 million (representing 50% of the remaining value of the contract).
In response, NHG argued that Ure had waived its ability to terminate by continuing to perform the contract for seven months after its rights to terminate initially arose in April 2018.
The Dispute Relating to Waiver
Where a party commits a repudiatory breach of contract, its counterparty may either terminate the contract or waive its rights to terminate and instead affirm the contract. An election to either terminate or affirm the contract can be made by any unequivocal words or conduct which communicate the elected choice.3 But, pursuant to the principle in Peyman, in order to make that election, the innocent counterparty must be aware of both (i) the facts giving rise to the right to terminate and (ii) the existence of the right itself.4 The innocent counterparty’s knowledge of each factor must be actual, rather than constructive.5
At Ure’s first instance application for summary judgment,6 Mrs Justice Moulder found that Genesis’ amalgamation with Notting Hill engaged Ure’s rights to terminate the contract. However, the question of whether Ure had waived its rights to terminate by continuing to perform following the amalgamation had to be determined at trial.
At trial, Mrs Justice Dias accepted that Ure’s continued performance after the amalgamation was, on the face of it, consistent with an election to affirm the contract.7 However, Dias J held that Ure lacked the knowledge required to elect to affirm the contract. Ure was clearly aware of the facts that gave rise to its right to terminate, namely the amalgamation. But Ure’s waiver of privilege over its communications with its solicitors showed that it was only made aware of the existence of a right to terminate on 5 November 2018, following which it promptly terminated the contract.8 Ure’s continued performance of the contract prior to November 2018 therefore did not amount to a waiver of its rights, and it was entitled to terminate and claim for the termination payment.
Judgment on Appeal
NHG then appealed to the Court of Appeal, arguing (among other things) that the principle in Peyman should be subject to an exception: In cases involving an express contract, a party to that contract should be deemed to know the terms of that contract, including any terms entitling that party to terminate.9 Thus Ure, whether or not it actually knew of the termination rights triggered by the amalgamation, should be taken to have known of those rights. On this argument, Ure satisfied both requirements under Peyman for waiver by election: Ure actually knew of the amalgamation and could be deemed to have known of its rights to terminate. By continuing to perform, Ure would therefore have waived its termination rights.
Lord Justice Males (with whom Lord Justices Zacaroli and Miles agreed) dismissed NHG’s appeal. First, the court held that the principle in Peyman is of general application.10 While the facts of Peyman differed because the right to terminate arose under general landlord and tenant law (rather than by contract), the principle nonetheless applies equally in cases where the right to terminate arises expressly under contract.11 Moreover, NHG’s case was not assisted by its appeal to L’Estrange v. Graucob Ltd,12 which stands for the proposition that a party is bound by the terms of a contract it entered into, whether or not it read or knew of that contract’s terms.13 Unlike in L’Estrange, there was no doubt that both parties were bound by their contract; the issue was, rather, whether Ure possessed the requisite knowledge to elect to affirm the contract when it had a contractual right to terminate it.14
Second, the court held that it would be “unrealistic” to suppose that a party to an express contract knows of all the terms of that contract.15 Given this, it would be unfair to impose upon contracting parties constructive knowledge of all the terms of their contracts, particularly where, as here, doing so would deprive them of the ability to exercise rights under the contract.16 This is especially so in cases involving complex contracts that admit of competing interpretations.17
Third, although there exists a presumption that a party in receipt of legal advice is aware of its rights,18 this is a “presumption of fact which is capable of being rebutted”.19 Ure rebutted the presumption by waiving privilege over its communications with its solicitors. In any event, the existence of this presumption was inconsistent with NHG’s suggestion that there exists a rule that a party to a contract is deemed to know all its contractual rights: “If there were such a rule, the presumption would be unnecessary”.20
Ure was therefore entitled to terminate in November 2018 and permitted to recover the termination payment.21 Against a backdrop of sustained academic and judicial criticism of the rule in Peyman,22 the court accepted that this result was somewhat “counter-intuitive, and indeed unmeritorious on the particular facts of this case”.23 The court expressed some apprehension as to the fact that “the amalgamation, which [Ure] had known about for more than seven months and to which it had never had any objection, was seized on as a justification for termination of the contract with a view to claiming a termination payment”.24
Takeaways
Ure Energy provides helpful clarification that the principle in Peyman applies in cases involving contractual termination rights. However, litigants seeking to rely on Peyman in relation to those contractual rights may face an uphill battle.
First, where parties are in receipt of legal advice, they are presumed to know of their rights. Although this presumption can be rebutted, to do so, one must make the weighty decision to waive privilege.25
Second, in a case in which a party seeks to rely on the principle in Peyman, the “healthy scepticism of first instance judges” may lead to careful scrutiny of a party’s claim that it was unaware of its rights.26 Courts may be all the more sceptical of such a claim in a case involving sophisticated commercial parties. In any event, a party cannot rely on its deliberate ignorance of its contractual rights in order to obtain protection under Peyman.27
Third, where a party’s conduct unequivocally suggests an election to affirm a contract, and the non-waiving party has relied on that conduct to their detriment, the first party will be estopped from seeking to terminate.28 This will be the case even if the first party lacked the requisite knowledge to affirm under Peyman.29 This was, however, not the case in Ure Energy where the first instance judge found no detrimental reliance by NHG.
This post was prepared with the assistance of Conor Hay in the London office of Latham & Watkins.
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