Election requires reflection: waiver of a contractual right to terminate requires knowledge of the right

The Court of Appeal has said that a party will not waive an express contractual right to terminate merely by continuing to perform after the trigger event unless, at the time, it knew of that right. 

Amalgamation

URE contracted to supply electricity to Genesis Housing Association. Genesis amalgamated with Notting Hill Housing Trust to form Notting Hill Genesis without URE’s prior approval. Only after taking legal advice, seven months later, did URE appreciate that the amalgamation triggered an express termination right. It then acted promptly to terminate and claim a contractual termination payment.

Troublesome case law

The challenge facing Notting Hill Genesis was a 1980s decision: Peyman v Lanjani. This says that when it comes to determining whether you have waived a right to terminate, it is not enough to say that you knew of the facts giving rise to the right and did not exercise it, you must also have known that you had the right. On the facts, Peyman concerned a right under the general law to terminate, not an express contractual term. Notting Hill Genesis argued that it is a basic principle that a party cannot contend that it did not know or understand the express contract terms to which it had agreed. 

The Court of Appeal accepted that Peyman had not been met with universal acclaim but nonetheless found that it establishes a general legal principle and applies equally to express contractual rights and those found in law. The knowledge may be actual or “blind eye” (where a party deliberately chooses not to discover something which is obviously available to it). Mere delay is not a substitute for knowledge. 

Although there is a presumption that a legally advised party knows its rights, URE waived privilege over its legal advice and this showed it had not been advised on the termination clause. 

The Court said there were mitigations to the operation of Peyman:

• Termination rights may expressly or impliedly require to be exercised within a reasonable time.
• Claims of ignorance may meet judicial scepticism provided the right is not buried in the small print.
• Many legally advised parties will not be able to rebut the presumption that they did not know of the right.
• Estoppel can still bar termination where conduct amounts to an unequivocal representation on which the counterparty detrimentally relies. 

In reality

Although the common law stepped in, in this case, in practice, parties should ensure clarity on termination mechanics at the drafting stage and seek legal advice promptly when potential trigger events arise, so that rights are understood and, if appropriate, exercised in good time.

Judgment: URE Energy v Notting Hill Genesis