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UK – The contract termination that went horribly right
UK – The contract termination that went horribly right
29 October 2024
Series
Blogs
29 October 2024
Terminating for breach is a big decision. The recipient of your termination notice will typically claim the notice is both ineffective and a repudiation of the contract (which they accept). In other words: the contract comes to an end but, if you get it wrong, you are the one liable for damages.
The judgment in URE Energy v Notting Hill Genesis [2024] EWHC 2537 is a helter-skelter through a series of unlikely facts and an even more improbable outcome. It contains a number of important commercial lessons about terminating for breach.
URE entered into a contract in September 2017 to supply electricity to Genesis Housing Association. It was intended to run for four years on an “interim” basis, and would then be replaced with a 25-year contract. The supply contract contained the termination provisions below:
“10.2 The Supplier may terminate this Contract at any time for all or any Supply Premises if:
(b) 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; …
(d) the Customer passes a resolution for its winding up which shall include amalgamation, … (other than a solvent amalgamation… approved in advance by the Supplier) …;
10.5 Where, in relation to any Supply Premises, this Contract is terminated by the Supplier pursuant to clause 10.2, the Customer shall … pay to the Supplier the 50 percent of the remaining value of this Contract to the Supplier in respect of the relevant Supply Premises ….” (our emphasis).
These would turn out to be disastrous for the housing association.
In April 2018, Genesis Housing Association amalgamated with the Notting Hill Housing Trust to create Notting Hill Genesis (NHG). NHG promptly notified URE of the amalgamation, and informed it that the supply contract would transfer to NHG by operation of law. It would otherwise be “business as usual”. URE asked for details of any changes to the invoicing process, but otherwise expressed no concerns about the amalgamation.
Unfortunately, the amalgamation triggered a deterioration in the wider relationship. URE needed to install smart meters for regulatory reasons, but encountered significant problems as the site managers for NHG were generally unresponsive.
More importantly, NHG had decided it wanted to end the relationship with URE. It started to strictly apply the payment terms and said it would not enter into the longer 25-year contract.
This was a bombshell for URE, who decided to terminate the supply contract – twice.
It sent the first termination notice on 31 October 2018, without obtaining legal advice. The notice stated NHG was in material breach because of its failure to help install smart meters, and so the contract was terminated with immediate effect under clause 10(2)(b). URE accordingly claimed 50% of the expected charges for the remainder of the contract under clause 10(5).
After receiving legal advice, URE revoked that termination notice on 2 November 2018 and sent a second termination notice on 7 November 2018. That notice:
NHG responded, stating that the second termination notice was ineffective and constituted a repudiatory breach. It denied it was liable for the £4 million and counterclaimed for damages, including unpaid credit balances.
URE had a clear right to terminate as a result of the amalgamation.[1] Clause 10(2)(b) expressly refers to “amalgamation” and while there is a carve out for a solvent amalgamation, that applies only if approved in advance by URE. No approval was obtained.
This was unwise drafting for NHG. There is a significant risk this type of provision will be overlooked in a merger – leaving NHG exposed to an arbitrary termination event and a significant and unfair exit payment. It also appears neither party understood the commercial effect of the clause. If URE had been aware of its effect, it would have referred to it in the first termination notice. If NHG had understood it, it would never have agreed to it.
However, the fact that neither party understood the clause and that it has drastic commercial implications does not matter. English contract law takes an objective approach to interpretation and the words are clear. “The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language” (Arnold v Britton [2015] UKSC 36).
If a party wants to terminate, it is common practice for clever lawyers to rake through the history of the contract to “manufacture” reasons for the termination. These rights are sometimes largely unconnected with the commercial reality leading to the end of the relationship.
The law has countermeasures to address this. One is the concept of “waiver”. In broad terms, a party with a termination right must “use it or lose it”.
However, there are several different types of “waiver” under English law, and it is important to establish the exact doctrine relied upon as the conditions for each type vary significantly. Here, the courts had already rejected the case for “promissory estoppel”[2] as there had been no detrimental reliance by NHG. There was also no attempt to argue that the right had been lost because of “estoppel by convention” (likely because it also would not have applied).
The focus was instead on whether there had been a “waiver by election”. URE will have waived its rights if:
URE was informed of the amalgamation in April, and its actions since then were only consistent with a decision to continue the contract. For example, by introducing new plans to speed up the rollout of smart meters.
The judgment therefore turned on whether URE was aware it had the right to terminate. In relation to this, URE was in receipt of legal advice, so there is a presumption that it had been appropriately advised and was aware of its rights (Peyman v Lanjani [1985] Ch. 457).
However, this presumption is rebuttable and so URE took the unusual step of waiving privilege with its lawyers. The correspondence showed that URE’s lawyers had not provided advice on this specific point (either when negotiating the contract or subsequently) until the drafting of the second termination notice. Accordingly, there was no waiver by election.
The Court’s decision is troubling for two reasons. The first is why URE’s knowledge was contingent on getting external legal advice. URE could simply read the words of the contract to understand its rights – we do not live in a pre-Reformation world in which there must be intermediation by lawyers between commercial parties and their contracts. While there might be cases in which complex regulatory questions must be answered to understand the effect of a contract, the decision seems to infantilise commercial parties.
The second is that, where the right to terminate arises, “the time may come when the law takes the decision out of [a party’s] hands, either by holding [it] to have elected not to exercise the right which has become available to [it], or sometimes by holding [it] to have elected to exercise it” (The Kanchenjunga [1990] 1 Lloyd’s Rep 391). There were eight months between the amalgamation and the termination which would seem easily long enough for the matter to be taken out of URE’s hands. The Court concluded this mere lapse of time does not involve a positive act, so there was no waiver by virtue of the “no waiver” boilerplate provisions in the contract. However, that decision is hard to reconcile with previous judgments, such as the Court of Appeal’s decision in Tele2 v Post Office [2009] EWCA Civ 9.
In summary, URE was fortunate not to have waived its right to terminate following the amalgamation. The second termination notice was effective.
Another countermeasure to protect against “manufactured” termination claims is a common sense approach to the evidence. For example, URE’s alternative grounds for breach was an argument that NHG was in material breach because of its failure to cooperate to install smart meters (clause 10(2)(b)).
For a breach to be material it must be serious and substantial. This requires an assessment of a wider range of factors, such as the terms of the agreement, the circumstances in which the breach was committed and its nature and consequences. This is not a straightforward matter and is likely to be heavily influenced by contemporaneous actions and correspondence.
In this case, URE did complain about the lack of cooperation. However, it was working with NHG to find a solution, and did not consider the issue insurmountable. There was no indication that URE was treating it as a serious contractual failing by NHG and so, unsurprisingly, the ex post claim that this was a material breach was not made out.
Even if this was a “material breach”, URE should have given NHG 10 days to remedy it. It didn’t do this, because the second termination letter stated the contract would end regardless of whether the breach was remedied. URE argued that this remedy period should not apply if it is clear the breach could not be remedied within 10 days, but the court rejected that argument.
As URE validly terminated following the amalgamation, it was entitled to a termination payment equal to “50 percent of the remaining value of this Contract”, which had three years to run (clause 10(5)).
The question for the court was whether “value” meant charges or profit. The court concluded that this meant charges. In particular:
The remaining charges under the contract were around £8 million, so the termination payment was £3,946,861.56. This represents a significant windfall for URE, which is likely to be well in excess of the profits expected from a normal electricity supply contract (where the margin between electricity purchase and sale costs is tight).
However, it is not a contractual penalty. The rule on penalties applies only if the provision is a secondary obligation – i.e., a right to damages triggered by a breach of contract (Cavendish v Makdessi [2015] UKSC 67). Here, the payment was triggered by the amalgamation of NHG (which is not a breach of contract) and so was clearly a primary obligation.
The case is also unusual because URE’s first termination notice only referred to material breach, and so would have been both ineffective and a repudiation of the supply contract. However, a repudiatory breach is a thing writ in water unless and until it is accepted.
In this case, NHG did not accept the repudiation in time, so URE was able to rescind the first notice two days later and craft a second notice that was effective. URE was fortunate to get a second chance.
Terminating a contract for breach is a big call. In this case, it paid off. URE not only terminated the contract but also secured a significant termination payment. Others may be less fortunate. What are the lessons to be learnt?
The judgment in URE Energy v Notting Hill Genesis [2024] EWHC 2537 is available here.
[1] This was an issue resolved at an earlier summary judgment application, URE Energy Ltd v Notting Hill Genesis [2022] EWHC 1809.
[2] At the summary judgment application, see footnote 1.