The Court of Appeal has handed down a judgment confirming that a party cannot waive a contractual right to terminate a contract unless it is actually aware of that right, even if it is expressly set out in the contract.

Background

The case concerned a contract between a start-up company, URE Energy Ltd (URE), and the Genesis Housing Association (Genesis) under which URE would supply electricity to Genesis’ housing estate for four years, during which time it was envisaged that a longer-term contract would be agreed upon.

Amongst the contract’s various provisions was a term that entitled URE to terminate the contract if Genesis passed “a resolution for its winding up which shall include amalgamation, reconstruction, reorganisation…” The contract also included a non-waiver clause, providing that no delay or omission in exercising rights would be construed as a waiver of those rights.

Four months after URE started to supply electricity, Genesis passed a special resolution to merge with another housing association, becoming Notting Hill Genesis (NHG). Notice of this amalgamation was sent to Genesis’ existing suppliers, including URE.

Later that year, relations between NHG and URE began to break down, resulting in NHG informing URE that it did not intend to proceed with a long-term contract. After initially alleging that NHG was in breach of the contract for failing to provide access for the replacement of electricity meters, URE changed tact and focused instead on the amalgamation. As the judgment puts it, URE “seized on [the amalgamation] as a justification for termination of the contract with a view to claiming a termination payment, once it became clear that there would be no long-term contract”.

NHG denied any breach on its part and argued that URE’s purported termination was itself a repudiatory breach.

High Court

URE issued proceedings against NHG and claimed a termination payment under the contract (or alternatively common law damages for repudiation of the contract) arguing, among other things, that it was entitled to terminate the contract as a result of the amalgamation.

Following an unsuccessful application from NHG for summary judgment, the case fell to be determined by Mrs Justice Dias. One of the questions for her to consider was whether URE had elected to affirm the contract by continuing to perform it. On this question, it was common ground that – applying Peyman v Lanjani [1985] Ch 457 – 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.

As to whether URE knew of its right to terminate the contract, this was a factual matter. The High Court found that whilst URE’s owner knew of “the facts giving rise to the right to terminate” (i.e. the amalgamation), he did not know that, under the contract, the amalgamation gave URE a right to terminate. As the judge explained, he had “skim read” the contract so he was aware that the contract included termination rights and that termination by URE would trigger a termination payment, “but he did not give the clause much attention and thought that [it] was dealing with the position on an insolvency”.

The judge added that “although there was an evidential presumption that a party in receipt of legal advice has been appropriately advised and is aware of its rights”, URE had successfully rebutted that presumption after waiving privilege in the advice it received from its lawyers.

The judge also found that if had URE known of its right to terminate as a result of the amalgamation, its conduct of continuing to supply energy and submit invoices would have been sufficiently clear and unambiguous to amount to a waiver. However, because it was not aware of the right, no such waiver had been given.

The Court of Appeal

NHG appealed the decision of the High Court, arguing – among other things – that URE did have knowledge of its right to terminate the contract because it was expressly set out in the contract. Seeking to distinguish Peyman v Lanjani, NHG contended that the principle in that case does not apply where the right to terminate is an express contractual right, such that a party can be deemed to know of its existence. As the judgment puts it, NHG argued that “it is a basic principle that a party cannot contend that it did not know or understand the contract terms to which it had agreed, and that any other conclusion would be contrary to the fundamental importance of certainty and predictability in commercial transactions”.

However, the Court disagreed. It held that a party cannot be assumed to be aware of all the terms to which it has expressly agreed, explaining that “while some contracts may be reasonably straightforward, and parties may in fact be familiar with their terms, others contain detailed (and sometimes indigestible) provisions which it would be unrealistic to expect the parties to carry in their heads”.

The Court acknowledged the “powerful criticisms of Peyman v Lanjani which have been made both academically and judicially”, including from Mr Justice Leggatt (as he then was) who argued that “the need for knowledge of the legal right, although established by authority, is difficult to justify in principle. The requirement is inconsistent both with the principle that ignorance of the law is no defence and with the principle that in the field of commerce the existence and exercise of legal rights should depend on objective manifestations of intent and not on a party’s private understanding. It is also potentially extremely difficult for the other party to prove such knowledge – all the more so since any relevant legal advice which may have been received will be protected from disclosure by legal professional privilege”.

Nonetheless, the decision in Peyman still stands. In fact, Lord Justice Males said that it was not an “unprincipled” one, as it “rests on the principle of fairness that a person who has a right to choose between alternative courses of action should not lose that right if they do not even know that they have it”.

He also offered some comfort to those who might worry about the potential unfairness of the rule by identifying a number of possible ‘mitigations’. For example, where the election arises from an express contractual right, it may be possible to construe the right in question as having to be exercised within a reasonable time. Equally, he suggested that “the healthy scepticism of first instance judges” will work against those claiming they were not aware of their rights.

In this case, however, such mitigations did not apply. Therefore, summarising the position of the Court and dismissing NHG’s appeal, Lord Justice Males held that “there is no rule of law that, for the purpose of the principle of waiver by election, a party is deemed to know the terms of its contract. Whether it has the relevant knowledge is a question of fact”.

To read the judgment in full, click here.