U.K. Commercial Litigation Alert
January 2009
Authors:
Sean Kelsey
sean.kelsey@klgates.com
www.klgates.com
English Court of Appeal finds non-waiver clause no
defence to an unlawful termination of contract
+44.20.7360.8180
Introduction
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A non-waiver clause is a piece of commonplace boilerplate appearing in commercial
contracts of every kind. Typically, such a clause will seek, inter alia, to preserve an
innocent party’s rights in respect of another party’s breach of contract in circumstances
where the innocent party delays or neglects to enforce those rights.
Commentators have questioned the effectiveness of non-waiver clauses, but it had
been believed that there was no direct authority on the question. It is therefore of
some interest to note that last week the English Court of Appeal found that, where an
innocent party delayed the purported exercise of a right to terminate which arose on a
breach of contract and continued to perform the contract, a non-waiver clause did not
act to preserve the right to terminate, and the innocent party’s purported termination of
the contract some 11 months after the relevant breach of contract was itself an unlawful
repudiatory breach. Were it not for the finding that the only counterparty entitled to
substantial damages had in fact suffered no loss, reliance on the non-waiver clause
would have constituted a very costly error.
The Facts
In Tele2 International Card Company SA & Ors v Post Office Limited [2009] EWCA
Civ 9, the parties had entered into a contract for the supply of pre-paid phonecards
and associated services to, and their promotion by the Defendant. Under the contract,
each of the Claimant companies was obliged to provide the Defendant with a parent
company guarantee for the forthcoming calendar year by 24 December in each year of
the contractual term. A termination clause provided, inter alia, for the termination of
the contract by notice in the event of a failure to provide a parent company guarantee.
Clause 16 of the contract stated as follows:
“16 Waiver
In no event shall any delay, neglect or forbearance on the part of any party in enforcing
(in whole or in part) any provision of this Agreement be or be deemed to be a waiver
thereof or a waiver of any other provision or shall in any way prejudice any right of
that party under this Agreement.”
On 1 December 2004, the Defendant sent notice of termination with effect from 31
March 2005 because of a failure to provide parent company guarantees for 2004 by 24
December 2003 – almost a year earlier. The Defendant ceased to perform the contract
from 31 March 2005 and proceedings were issued by the Claimants for repudiatory
breach of the contract.
First instance proceedings
At first instance the judge concluded that he would have held that, but for clause 16
of the contract, the Defendant had affirmed the contract by election by its conduct
U.K. Banking Alert
in carrying on with the performance of the contract
from 25 December 2003 until the termination notices
were sent on 1 December 2004. However, the judge
continued, clause 16 prevented the Defendant
from losing the right to terminate. The Claimants’
claims for repudiatory breach therefore failed. The
Claimants appealed.
Judgment on appeal
The Court of Appeal applied relevant general
principles relating to the law of waiver. In a nutshell,
these stipulate that, when a party breaches a contract
in a way which entitles the innocent party to bring
that contract to an end, and the innocent party
knows as much, then the innocent party must decide
whether or not to exercise its right. This decision is
known in law as an “election”. The innocent party
has in the end to make his election, not as a matter
of obligation, but in the sense that, if he does not
do so, the time may come when the law takes the
decision out of his hands, either by holding him
to have elected not to exercise the right which has
become available to him, or sometimes by holding
him to have elected to exercise it.
Where a party, which has, and knows it has a right
to terminate a contract, acts in a manner which is
consistent only with it having chosen one or other
of two alternative and inconsistent courses of action
open to it (i.e. to terminate or affirm the contract),
then it will be held to have made its election
accordingly. Such an election can be communicated
to the other party by words or conduct. However,
in cases where it is alleged that a party has elected
not to exercise a right, such as a right to terminate
a contract on the happening of defined events, it
will only be held to have elected not to exercise
that right if it “has so communicated [its] election
to the other party in clear and unequivocal terms.”
Whether a party has elected to terminate or to affirm
the contract is a question of fact: either a party has
affirmed the contract or it has not. If the innocent
party has not affirmed the contract, then the right to
terminate will be exercisable still.
The Court of Appeal found that “the continued
performance by [the Defendant] of the Agreement
for nearly a year without any protest or reserve of
any kind in relation to the failure to provide the
[parent company guarantees] is…only consistent
with an election to abandon the right to terminate
for that breach.” Clause 16 did not prevent the fact
of an election to abandon the right to terminate
from existing. Indeed, it was held that clause 16 did
not deal at all with the issue of a party’s election
whether or not to exercise a contractual right, and
did not attempt to disapply the doctrine of election,
even assuming that any contractual provision could
exclude the operation of the doctrine. Thus the
Court appears to have concluded that clause 16
begged the question whether the Defendant any
longer had the right of termination which it had
purported to exercise; and that in seeking to protect
the Defendant’s rights under the contract from
any “prejudice” clause 16 begged the question of
whether the Defendant by its own conduct might be
held to have abandoned those rights itself.
Comment
The case has left some interesting further questions
unanswered. Not least, the Court of Appeal was not
asked to decide what, if anything, the non-waiver
clause in question actually achieved (though it was
contended in argument for the Claimants at first
instance that clause 16 was intended only to prevent
waiver of any of the parties’ primary obligations
under the contract – such as the supply of phonecards
and associated services by the Claimants, or their
promotion by the Defendant). Finding that, as a
matter of construction, clause 16 did not extend to
an election to affirm by conduct, the Court left open
the question of whether or not it might be possible to
draft a clause which disapplied the relevant general
legal principles altogether. Even if contractual
wording serves to preserve the right, it is unclear
how long that right might survive if the innocent
party also continues to perform the contract.
The Court of Appeal’s decision does appear to
suggest that many standard non-waiver clauses may
not save an innocent party to a contract from an
election by conduct to abandon a right of termination
which has arisen on a breach of contract. This may be
of particular relevance at a time when many parties
to commercial contracts – and their counterparties
– may be re-evaluating the commercial reasoning
behind their bargains, and perhaps looking for
January 2009 | 2
U.K. Banking Alert
ways to get out of them. The first instance judge
and the Court of Appeal both noted that two of
the Defendant’s witnesses had admitted that the
commercial reasons for the Defendant wishing to
terminate the contract had nothing to do with the
failure to provide parent company guarantees. As
was made clear by both the first instance judge and
the Court of Appeal, the motive for terminating the
contract was immaterial to the question of whether
the Defendant was entitled to terminate or not.
However, the facts of the case illustrate the potential
risks in relying on a non-waiver clause to preserve
a right of termination arising on a ‘historic’ breach
of contract, as the law may treat this purported right
as having been abandoned.
This alert is for informational purposes only and
does not contain or convey legal advice. The
information herein should not be used or relied upon
in regard to any particular facts or circumstances
without first consulting with a lawyer.
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©2009 K&L Gates LLP. All Rights Reserved.
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