31/03/2022
Introduction
In the recent case of Langage Energy Park Ltd v EP Langage Ltd [2022] WL, the Court looked at the decision making process for a party serving a Notice to trigger contingent obligations.
The Facts
The background to this matter is lengthy but, in summary, a contract was entered into in 2008 between Langage Energy Park Limited (the Claimant) and EP Langage Ltd (the Defendant) for the development of certain infrastructure for services to be supplied to Langage Energy Park, a site which was to include a gas-fired power station operated by the Defendant, as well as starter units for businesses in the district.
The contract established obligations for the Defendant to carry out the Development work in three phases. Phase 1 was for the installation of flanges for the connection of hot water pipework to the Energy Centre, and ductwork to accommodate pipes for hot water, high pressure un-odorised gas ("HP gas") and electricity cables (“Pipes and Cables”).
The second phase was to be for the installation of the Pipes and Cables themselves. However, this was contingent on written notice by the Claimant to the Defendant "that there is or will be a demand … from the occupier[s] of the Qualifying Buildings" for any of the Services.
On 27 June 2018, the Claimant served a notice on the Defendant in writing, stating that:
“Whilst the Development of the Energy Park has been delayed due to the economic crisis… the market is now improving and we notify you that we expect to have occupiers in place, and consequently a demand for hot water, un-odorised gas and electricity supplied by the Power station, by mid-2019. We therefore wish to remind you of the requirements … for you to install the additional infrastructure to facilitate provision of the discounted services”
This was some 10 years since the date of the Contract, and in circumstances where no development of the Energy Park land had in fact taken place.
The Defendant was sceptical about the demand and requested the identity of the potential occupiers. The Claimant responded by asserting the confidentiality of the future occupiers and by asserting that they were under no obligation to provide any further information. A stalemate ensued.
The Claimant therefore issued Court proceedings, seeking declarations confirming the validity of the Notice and the obligation of the Defendant to build the infrastructure. In turn the Defendant served a Part 18 request requesting the factual circumstances in which the Claimant was entitled to serve the notice, and whether there was a specific occupier at the time of the notice being issued.
The Claimant responded that it was entitled to serve a notice if it honestly believed that there was or would be a demand for utilities.
Decision
The Court noted that, when the Notice was served, Phase 1 works had been completed at a relatively low cost to the Defendant. However, the Phase 2 works would be significantly more substantial and expensive.
The Court did not accept the Defendant’s argument that an occupier had to be identified before the Phase 2 works could be carried out was rejected; the Court noted “It would make little business sense for the Claimant or anyone first to build units, so that there are Qualifying Buildings that are occupied . . . and then for notice to be able to be given requiring the provision of pipes and cables . . . “
However, the Court also considered it was only right and proper that notice could be given by reference to the question of whether prospective occupiers of the development would have need for the Services. The Claimant did not have an automatic right to give notice, or it could have done so in 2008 when the contract was signed.
The Court did not consider that it was sufficient for the Claimant to show it held a belief that there would be a future demand. The Court noted (pursuant to the Supreme Court decision of Braganza v BP Shipping Ltd [2015]) that, where a party to a contract is given sole power to make an evaluative decision, in circumstances in which that party’s self-interest may conflict with the other party’s interest, a term can be implied that the decision must be made in a reasonable way. The exercise of a contractual discretion should not be exercised “arbitrarily, capriciously or unreasonably” (The Product Star (No.2) [1993]).
On the evidence, the Claimant did not, in fact, believe that there would be a demand for the services from occupiers of the Qualifying Buildings. It was further noted that, when the Energy Centre was commissioned, gas-fired power was regarded as “clean energy”. By 2018, however, the sands had shifted and the carbon profile of gas-fired energy was significantly higher than electricity from the National Grid. This was relevant to what the Claimant believed about occupier demand at the time of the Notice, which was determined to be minimal.
The Notice was therefore deemed to be invalid.
Conclusion
For parties seeking to exercise a right under a contract, clear evidence of the decision making process is critical. If there is no evidence, the risk is that the decision will be challenged as unreasonable or irrational.
When drafting such provisions, contractual parties should ensure clarity of intention and operation to seek to prevent such arguments arising.
Witten by Judith Hopper and James Crabtree
