Back to basics: No waiver clauses

In this insight we consider how to correctly include a ‘no waiver’ clause in security documentation, and also consider examples of when these clauses have not had the desired effect.

What is a waiver of rights?

A waiver of rights occurs when a party to a contract indicates that it will not exercise a right or remedy under that contract. By inserting a ‘no waiver’ clause into the relevant contract, the intention is that one party’s failure or delay to enforce its rights or remedies, following a breach of contract by the other party, does not result in the loss of those rights or remedies.

If a party breaches a contract the innocent party may either enforce its rights and remedies under that contract, complain about the breach but take no action or ignore the breach completely. However, if the innocent party delays its decision as to what course of action to take it risks losing the right to take any action against the party in breach.

The term ‘waiver’ essentially means a person giving up their legal, or contractual, rights. A waiver of contractual obligations will occur when one party makes it clear to the other that it does not intend to enforce its contractual rights or remedies, this can be done orally, in writing or inferred from the party’s conduct.

How can rights be waived?

• Waiver by contract (or deed) – if a party has agreed to waive its rights, the waiver is likely to be contractual. A formal waiver letter, deed or other variation agreement will be drafted and sent to the other party.
• Waiver by election – following a breach, an option is triggered and the innocent party can take one of a number of routes. Electing, or choosing, one of those options means that the others are no longer available. One of the most common forms of waiver by election is where the breach gives a party the right to either end the contract or to continue with it (a repudiatory breach). If the latter is chosen, the party cannot later exercise its right to terminate (see the case of Tele2 below).
• Waiver by estoppel – here, because of a party’s behaviour estoppel restricts that person from relying on certain rights or acting in a certain manner if doing so would be unfair or prejudice the other party.

No waiver clauses

No waiver clauses are very common and in finance transactions almost all agreements will contain one, however doubt still remains as to their effectiveness. The effectiveness of these clauses is of particular importance to banks and lenders, as when a borrower is in default the lender will want to ensure the appropriate rights and remedies remain available.

In Tele2 International Card Company SA and others v Post Office Ltd [2009] EWCA Civ 9 the Post Office sought to rely on a no waiver clause. Tele2, a supplier of the Post Office, breached a contract but the Post Office continued to perform their obligations for a whole year before complaining about the breach and giving notice of termination of the contract.

The court considered waiver by election and said that had it not been for the no waiver clause, the lack of action by the Post Office would have amounted to waiving the breach. It decided that due to the inclusion of the clause, the delay in complaining about the breach could not be deemed to be a waiver of any rights to terminate the contract.

Tele2 appealed and the Court of Appeal overturned the decision, agreeing that the delay and the continuation of the contract did amount to an election, and also amounted to choosing to abandon the right to terminate the contract.

Considerations for banks and lenders

Borrowers will be in breach of contract if an event of default occurs and the lender should send a reservation of rights letter soon after becoming aware of the breach. Doing so prevents any conduct of the lender being construed as affirming the contract and therefore waiving the breach, this could prevent or delay enforcement of security, at least in respect of that breach.

No waiver clauses are essential in security documents and they are only likely to be thrown into doubt when the conduct of the parties is considered. Ensuring a breach of contract is dealt with efficiently and as quickly as possible is likely to protect the rights of a lender to remedy the breach. It would appear that following Tele2, a no waiver clause would not protect a lender’s rights indefinitely and may only provide a short window in which to act.

In summary, a no waiver clause should always be included in finance documentation but lenders should still ensure that they are in a position to take appropriate action as soon as an event of default occurs. This includes sending a reservation of rights letter to protect the lender’s position. Delaying taking any action could be deemed as affirming the contract and the lender’s ability to enforce its security will be affected.