The Court of Appeal's ruling in URE v Notting Hill Genesis highlights the importance of not treating termination wording in a contract as boilerplate. What appears to be "standard" drafting may contain unexpected rights allowing one party to bring the agreement to an end and even to claim compensation. The ruling also looks at what happens where there is a delay in exercising a termination right.
Beware "standard" termination clauses: key lessons from the Court of Appeal
Overview
What happened?
The case involved a supply contract between URE (a start-up energy provider) and Genesis, a housing association. The parties planned to enter into a 25-year deal, but entered into an interim four-year contract, to allow more time for URE to secure the necessary investment and to negotiate the long-term arrangement.
A few months in, Notting Hill merged, by way of amalgamation, with Genesis, creating Notting Hill Genesis ("NHG"), notifying URE after the fact, but crucially, without asking for its approval.
A year into the four-year contract, the relationship between the parties deteriorated, with NHG signalling that it was pulling out of the longer term arrangement, prompting URE to seek urgent legal advice. This advice revealed a termination clause that, although largely consisting of conventional insolvency-related triggers, also provided for a change of control right, triggered by the merger with Notting Hill. This entitled URE not only to terminate, but also to claim a substantial termination payment from NHG.
NHG argued that URE had known about the merger for six months and had waived its right to terminate by continuing under the contract. The Court of Appeal disagreed, ruling that a party cannot waive rights it does not know it has, and in complex contracts, businesses cannot be expected to be alive to every technical detail without legal input.
Don't treat termination provisions as boilerplate
When negotiating under time pressure, there can be a tendency, particularly in the context of long and complex commercial agreements, to assume that familiar looking termination clauses are mere "boilerplate" that can be safely passed over without detailed review. However, this case is a reminder that standard drafting can sometimes be mixed together with more unusual or far-reaching termination rights, that are only likely to become apparent on a closer reading of the contract.
In this instance, the relevant termination clause was drafted in a way that, to a large extent, mirrored typical insolvency triggers but also, less obviously, extended to cover any amalgamation or change of control at the counterparty – including a solvent amalgamation.
Key lessons
- In any new contract, termination rights deserve a bespoke review, ensuring full understanding of any rights which may be triggered by wider corporate events such as mergers or group reorganisations.
- When an unexpected development occurs, not just insolvency, but also restructuring, amalgamation, change of ownership, internal transfers, or a material breach, it is essential to pause and re-examine all contractual exit routes, rather than assuming these have not been triggered.
How long can you delay the termination?
A further issue in URE v Notting Hill Genesis was whether a party loses its right to terminate if it delays in exercising it after a trigger event. Here, URE continued to perform under the contract for more than six months after the amalgamation, only seeking to terminate upon legal advice later. The Court of Appeal held that URE’s right to terminate was not lost by delay alone, because it did not have actual knowledge of the right until it received legal advice, and this knowledge is a necessary condition under the Peyman principle.
What is the Peyman Principle?
In Peyman v Lanjani (1985), the Court of Appeal ruled that a party can only waive a contractual right if they have actual knowledge of that right. Simply continuing to perform under a contract when you do not realise you have a right to terminate does not by itself amount to a waiver of that right.
However, the courts will carefully scrutinise any claim of lack of knowledge. If the termination right is commonplace or obvious, such as a material breach termination right, courts are likely to be sceptical that a business was unaware of the right. By contrast, where a right is not typically included as "standard", the court may be more willing to accept that it had slipped under the party's radar – as was the case here.
This may offer some comfort to parties who may overlook a contractual right amid the pressures of commercial life, especially in technical or lengthy agreements. A right will not automatically be waived just because the exercise of the right is delayed or the party continues to perform.
Despite this, timing can still be critical and businesses should not assume that, where there has been a significant delay, the courts will always give them the benefit of the doubt.
Why delay is often a problem in practice
- Once a party knows a termination right exists, time is no longer on their side. Continued performance, statements to the other party, or any reassurance may be taken as evidence that the right was affirmed or abandoned. Courts will look very closely at conduct after knowledge arises.
- Even before knowledge, delay may not be risk-free. In some cases, rights may lapse under the contract or be lost through estoppel if the other side has relied on ongoing performance to their detriment.
- Judges are often sceptical about parties claiming not to be aware of important rights, particularly in sophisticated or legally advised contexts. The bar for proving ignorance is high, and privilege over legal advice may need to be waived to substantiate any such claim (as it was in this case)
While URE v Notting Hill Genesis makes clear that delay alone is not always the end of the road, anyone discovering a termination right some time after the trigger event actually occurred should seek advice promptly. Facts matter, the risk of a misstep remains, and the safest course is always to act swiftly once you become aware of your rights.
Spotlight on termination
This is the first in a series of briefings discussing common practical issues in connection with termination of commercial contracts. Among other things, we'll be looking at what counts as a material breach, when a breach allowing termination is likely to be seen as remediable and what happens when you have several termination rights that you could rely on at the same time.
