Affirming or terminating a contract – do you need to know your own terms?

The Court of Appeal’s decision in URE Energy Limited v Notting Hill Genesis is an interesting decision dealing with the extent to which a party to a contract may or may not be assumed to know or understand the express terms of its own contract, without the benefit of legal advice, when electing to make decisions.

In summary of the facts of the appeal:-

• The Claimant URE Energy Limited (URE) was a start-up company with the aim of supplying electricity to the Defendant, Genesis Housing Association (Genesis).
• A tender process was commenced by Genesis for a fixed price supply contract over a period of three or four years. The duration was later revised, and a new tender was sought for twenty-five years.
• URE submitted a bid which would also include the installation of LED lights, automated meter reading (AMR) and the creation of a solar farm.  
• URE was successful in its bid, but the parties were not in a position to conclude the twenty-five-year agreement and URE needed to secure finance.
• There was an urgency to enter into a contract, because Genesis’s existing arrangement was coming to an end and the amounts payable would be much higher energy prices, therefore a contract was concluded for a period of four years.
• URE had an issue installing meters, because NHG site managers would not engage with the process and therefore URE could not gain access to install the AMR meters.
• Crucially to this case, Genesis merged with Notting Hill Housing Trust and became known as Notting Hill Genesis (NHG) (the ‘Merger’). The long-term agreement was sent to Mr Ensor, the owner of URE. There had been some issues with the billing, which URE had attempted to resolve and ultimately, NHG decided it wanted to end the relationship with URE and not enter into the long-term agreement, written notice of termination was given.
• URE complained to NHG about the termination of the negotiations for the long-term contract and gave notice to terminate the four-year contract on the grounds that NHG had failed to provide access for the new AMR meters alleging a breach of contract against NHG and claimed a termination payment.
• URE’s termination was later withdrawn, and URE’s lawyers wrote to NHG on the basis that NHG had not sought URE’s approval for the Merger.

What did the High Court decide?

At first instance, the judge found that URE’s Mr Ensor was aware of the Merger and therefore knew of the ‘facts giving rise to the right to terminate’, but what he didn’t know was that the contract gave URE the right to terminate in the event of the Merger.

The court found that Mr Ensor had skim read the contract and was unaware that the termination of the contract by URE would trigger a termination payment, until he spoke to his solicitor. Mr Ensor thought that the clause related to insolvency. It didn’t occur to him that URE would be able to terminate in the event of a solvent termination because he hadn’t had legal advice.

URE had waived legal privilege, in relation to the advice given by their solicitor and therefore it was clear that Mr Ensor had not made a deliberate decision to avoid discovering whether the Merger would give URE a right to terminate.

What is legal privilege?

Legal privilege means that certain documents can’t be shown to the court such as legal advice from a solicitor. It is not common to waive legal privilege, hence why this case is more unusual.

What is waiver by election?

Waiver by election occurs when a person is entitled to more than one right, which is inconsistent with the other(s), and is aware of the relevant facts. That person is deemed to have chosen (elected) one right over the other(s) if the conduct is consistent with having chosen that right.  

What did the Court of Appeal decide?

The Court of Appeal was clear that NHG did not have permission to challenge the findings of facts. The appeal must be on the basis that URE did not know of its right to terminate the contract as a result of the Merger, and that it made no decision to avoid acquiring that knowledge.

In making its decision, the Court referred to a previous Court of Appeal decision of Peyman v Lanjani [1985]. In that case, the court took knowledge a step further and stated that “a party entitled to rescind or avoid a contract will not be held to have affirmed it unless it knows not only the facts which give rise to the right, but also that it has the right to rescind or avoid.”

In other words, if a party to a contract doesn’t know it has a right to terminate the contract, that lack of knowledge means that the party has not affirmed the contract even if it appears to have done so.

NHG had sought to argue that URE had affirmed the contract because URE knew of the Merger and continued with performance of the contract. However, the Court disagreed and noted that it was bound by the earlier case of Peyman v Lanjani.  Ultimately, knowledge was required and URE was not aware of the specific clause in the contract relating to the Merger.

The Court decided that URE was entitled to a payment of £3,946,861.56.

Comment

This decision is clarification that a party isn’t automatically assumed to know or understand all the terms of its own contract without legal advice. The decision confirms there’s no rule of law deeming parties to have knowledge of their express contractual rights, in the context of waiver by election. To waive a right, the party must actually know it has a choice to exercise that right or not. It will be interesting to see how this case is interpreted in the face of different types of contract and the expectations of knowledge placed on a party, for instance shorter and straightforward, whereas others will have detailed provisions which it was unrealistic to expect the parties to remember This reinforces the importance of legal advice when interpreting complex agreements.