Energy: The meaning of 'Value' and waiver of termination rights

In URE Energy Ltd v Notting Hill Genesis [2024] EWHC 2537 (Comm), the English Commercial Court was required to determine the meaning of the word ‘value’ in a termination remedies clause. As the word is widely used in oil and gas, and power contracts the approach of the court will be of interest to energy practitioners. The decision also provides a useful insight into what events may be needed to inadvertently waive a right to terminate. 

Facts

URE Energy Ltd (“URE”) is an energy company. Notting Hill Genesis (“NHG”) is a publicly funded charitable organisation.

On 17 July 2017, URE was purchased from Utilitgroup by Energy Logic Limited (“ELL”) owned by Mr Gary Ensor, with the specific purpose of entering into a contract to supply electricity and apply energy saving measures to the Genesis Housing Association (“Genesis”). Following the purchase, ELL changed its name to URE.

In September 2017, URE successfully bid for a 25-year contract with Genesis, which included installing LED lighting, constructing a 5-megawatt solar farm, and updating electricity meters to smart meters. However, the parties were not ready to finalise the long-term contract. Instead, on 29 September 2017, URE and Genesis signed a four-year electricity supply contract (the “Contract”) as a temporary measure, to be replaced by the long-term contract later. Since URE would charge below market rates under the Contract, the 25-year long-term contract was crucial for URE to recover its investment.

The Contract stated:

“10.2 The Supplier may terminate this Contract at any time for all or any Supply Premises if:

…

(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 ….”

On 22 March 2018, Genesis notified its existing suppliers, including URE, of a forthcoming amalgamation with Notting Hill Housing Trust (“NHH”) to become NHG, the defendant. On 3 April 2018, the amalgamation was formally registered. URE was informed that this would not affect their ongoing contract, and it was merely a name change. Subsequently, various issues arose between the Parties as to performance of the Contract.

Termination notices

On 31 October 2018, URE issued a termination letter citing material breaches by NHG, specifically the failure to provide access for meter installations and readings (“Termination Letter One”). URE subsequently forwarded Termination Letter One to its legal advisors, who referred the matter to their litigation team. Following further legal advice, Termination Letter One was subsequently revoked by URE (on the basis that URE was required to give NHG notice to remedy the alleged breach before the termination right could be triggered) (the “Revocation Letter”). URE confirmed in the Revocation Letter that it would continue to perform its obligations under the Contract and requested NHG to remedy the alleged breach of the Contract.

On 5 November 2018, a telephone call took place between Mr Ensor and a litigation partner from Burges Salmon during which Mr Ensor was advised that URE could have a right to terminate without notice on the basis that NHG had not sought URE’s approval for the amalgamation. Burges Salmon subsequently issued a second termination letter to NHG, this time citing the amalgamation as a ground for termination under clause 10.2(d) of the Contract and reiterating the material breaches (“Termination Letter Two”).

URE’s case

The principal claim made by URE in the proceedings is for a contractual termination payment in the sum of £3,946,861.56, said to be due on the termination of the Contract in November 2018. URE’s primary case was that the amalgamation of NHH and Genesis in April 2018 triggered a right for URE to terminate the Contract under clause 10.2(d) and that upon termination it became entitled to payment of the above sum pursuant to clause 10.5, which on its proper construction, was to be calculated by reference to URE’s anticipated future income over the remaining life of the Contract (the “Amalgamation Claim”).

Commercial Court Decision

The Court ultimately found that URE was entitled to terminate the Contract based on the Amalgamation Claim, and as a result was entitled to a termination payment.

The Court reiterated the applicable principles derived from the case of The Kanchenjunga, [1990] 1 Lloyd’s Rep. 370 at 389 and from the decision of the Court of Appeal  in Peyman v Lanjani, [1985] Ch. 457 at 487, 494, 500 (to which, as expected, there was little dispute between the Parties) namely:

1. Where a party (A) becomes entitled to terminate a contract, whether pursuant to a contractual right or a repudiatory breach by the other party or otherwise, it must elect whether to exercise that right or not;
2. in order to make that election, A must be aware both of the facts giving rise to the right to terminate and of the right itself;
3. A must actually make a decision. If it does not, the time may come when the law nonetheless deems an election to have been made;
4. if, with the requisite knowledge set out in ii) above, A acts in a manner which is consistent only with one or other of two inconsistent courses, it will be held to have elected accordingly;
5. an election can be made by any words or conduct which communicates an intention to choose one or other course of action but, particularly where A has elected to abandon a right which it would otherwise possess, such election must be communicated in clear and unequivocal terms.

Was URE aware of its right to terminate and, if so, when? Is knowledge to be inferred from the fact that it was receiving advice from Burges Salmon?

In respect of this sub-issue, the Court confirmed that “knowledge” meant actual knowledge and that simply having the means of knowledge is not enough. The Court acknowledged that Mr Ensor was clearly aware that the Contract included a clause 10 dealing with termination (which Mr Ensor regarded to be a “boiler plate” provision which he did not pay much attention to), but that there is a difference between knowing that a particular clause exists and understanding what it means or how it potentially applies in different circumstances.

NHG contended that by reason of URE having received legal advice from solicitors, it could be presumed that they were appropriately advised and aware of their rights. The Court found that this presumption is rebuttable and that URE, specifically, Mr Ensor, was not aware of the right to terminate under clause 10.2(d) of the Contract, until specifically advised by the litigation partner at Burges Salmon on 5 November 2018. The Court concluded that Mr Ensor did not understand the detailed provisions of clause 10.2(d) of the Contract and had not been advised about its implications by Burges Salmon prior to this date. The Court rejected the argument that URE had blind-eye knowledge or Nelsonian blindness regarding this right.

Did URE waive its right by continued performance?

In light of the Court’s finding that URE did not have the requisite knowledge of its right to terminate, the Court found that this question strictly did not arise. The Court noted that waiver by election requires knowledge of the right being waived, which URE did not have. The Court also considered the non-waiver clause (clause 31.1 of the Contract) and concluded that it did not preclude the doctrine of waiver but required clear and unequivocal conduct to constitute a waiver, which was not present in this case. That said, the Court emphasised that if URE had been aware of its right to terminate, its conduct following the amalgamation would have been sufficient and, on an objective basis, sufficiently clear and unequivocal to amount to a waiver.

Is URE to be deemed to have elected to continue with the Contract through lapse of time?

The Court also rejected NHG’s argument that the mere lapse of time between URE becoming aware of the amalgamation and its purported exercise of the right to terminate (some eight months) constituted an election to continue with the Contract. The Court held that a mere lapse of time, without more, is not a positive act and is therefore not caught by the non-waiver clause (clause 13.1 of the Contract). The Court concluded that the mere lapse of time did not amount to a waiver of the right to terminate.

What is the correct meaning of ‘value’ under the contract?

The parties agreed that if the Contract was validly terminated under clause 10.2(d), which the judge held it to be, URE would be entitled to a Termination Payment under clause 10.5. The key issue between the Parties in this respect was the meaning of the words “the remaining value of this Contract to the Supplier”. URE argued that this meant the anticipated future income over the remaining life of the Contract, while NHG contended it represented only the net profit that URE would have realised over the remaining term.

The Court favoured URE’s interpretation, concluding that the natural and ordinary meaning of the words suggests that “value” signifies the total amount payable to the supplier over the remaining life of the Contract. The Court also noted that given the inherent uncertainty in forecasting potential profits over the Contract’s term, the “value of this Contract” is better understood as the amount payable under the Contract to the supplier.

Comment

‘Value’

For energy practitioners, the Court’s approach to the meaning of the word ‘value’ in an energy related contract will be of interest. The word is regularly used in energy contracts, such as price review/re-opener provisions in Gas Sales Agreements and change of law provisions in long-term Power Purchase Agreements.

The meaning attributable to the word ‘value’ in any energy contract is likely to be heavily dependent upon the contractual context in which it is found. As such, the finding that ‘value’ means ‘revenue’ in the contract considered in this case is not necessarily directly translated to different legal circumstances.  In practice the word ‘value’ is often used in energy contracts as a form of compromise, without significant thought being given to how value should be assessed. The key take-away here is that whilst that lack of clarity may assist getting any deal over the line, it will not necessarily provide clarity in the event of a disagreement. Even in this case, there were other very credible approaches open to the Court. For example, it would be possible to assess the arms-length market value of the remaining term of the context by reference to what a willing third-party buyer would have paid to have the contract assigned to it. 

Waiver of termination rights

This case underscores that a right to terminate is not necessarily waived merely by continued performance if the party exercising the right lacked knowledge of the termination grounds. Waiver requires actual knowledge. In turn, that might require legal advice.

That said, notwithstanding the findings in this case, it remains important to act quickly is a potential right to terminate arises. There is a danger that a failure to do so will result in a lengthy, and costly, dispute as to whether a right to terminate has been waived.

Commercial Court Judge

Dias J