The importance of certainty in option agreements in the energy market

Issue 8 of the Energy and Natural Resources Case Law Update

Option agreements offer an important way of providing flexibility to parties in a highly volatile market. However, as the decision in Thurcroft Power Ltd (TPL) v Volta Energy Group Ltd¹shows, it is important that they are carefully drafted to provide as much certainty as possible. TPL was ultimately unsuccessful in its efforts to enforce an option agreement, including on grounds of unjust enrichment and breach of implied terms, since the court found that the option under the agreement had not been exercised.

Key takeaways

This case highlights the need for parties to ensure option agreements are carefully and unambiguously drafted to avoid subsequent disagreement between the parties over whether or not the option has in fact been exercised. In particular, where option agreements relate to the transfer of assets, parties should consider precisely what assets should be included under the agreement, and what will need to take place in order for the assets to be considered to have been transferred such that the option has been exercised.

Facts

This case involves battery storage facilities, a collection of high-power, high-capacity batteries which are used to store electrical energy taken from the National Grid. They purchase electricity from the National Grid when supply exceeds demand (at a low price) and provide supply stabilisation services when demand exceeds supply (at a high price).

Thurcroft Power Limited (TPL) was a special purpose vehicle incorporated to undertake the initial stages of a battery storage project. Volta was a company delivering battery storage projects. TPL and Volta entered into an option agreement which provided for a “Price” payable to TPL of GBP800,000 on the exercise of Volta’s option to have transferred to it certain “Assets” of TPL, which would enable Volta to develop the Thurcroft storage facility site.

In late 2017 / early 2018, the energy storage market collapsed due to the government’s decision to reduce how much it would pay for the batteries. Consequently, the profitability of the battery storage facility market substantially reduced. Volta never exercised its option and therefore did not pay the option price under the option agreement.

However, Volta sold certain rights to a third party – including an application for planning permission and the benefit of a number of connection offers, or quotations from the district network operator of the National Grid in respect of the proposed connection for the project as a whole.

The court was asked to determine:

• whether the definition of “Assets” in the option agreement included TPL’s rights to the connection offers such that the transfer by Volta might trigger the payment of the Price;
• whether Volta had been unjustly enriched at TPL’s expense as a result of the transfer to Volta of certain of TPL’s rights; and
• whether the option agreement contained an implied term that, after the expiry of the option period, Volta would cease to use any assets it had been using for the Project with TPL’s permission, in default of which it would be required to pay to TPL the Price.

The court’s decision

Definition of “Assets”

The option agreement defined “Assets” as:

“assets of TPL relating to the Storage Project which were, at the date of the Agreement or subsequently, owned by TPL and which include all assets in relation to the Storage Project made or submitted in the name of Thurcroft Energy Limited.”²

TPL’s case was that “Assets” as defined by the option agreement extended to TPL’s rights with respect to the connection offers, whilst Volta argued that it did not. The court found in favour of Volta, deciding as follows:

• the legal interest in the first connection offer had already been transferred to Volta prior to the entry into the option agreement, and therefore couldn’t reasonably be considered as part of the option agreement; and
• the second connection offer also pre-dated the option agreement, even though it was formally issued after the option agreement had been entered into.

The court also found that the description of the option agreement on its front sheet: “relating to planning documents relating to land adjacent to the electricity substation of Green Lane, Thurcroft”³ should be treated as akin to a heading of a clause in a contract and could be taken into account. The court was not convinced that the use of the word “Assets” (plural) necessarily meant that the option agreement encompassed TPL’s rights with respect to connection offers in addition to the planning documents (a single class of assets). Rather, the court found that the use of the word “Assets” (plural) was explicable on the basis that the draughtsman would have wanted to ensure that if there were other relevant assets clearly intended to pass, they would be caught by the general words used.

Unjust enrichment

The court considered the four elements of an unjust enrichment claim: (1) Has the defendant been enriched? (2) Was the enrichment at the claimant’s expense? (3) Was the enrichment unjust? (4) Are there any defences available to the defendant?

The court noted that, “whilst unjust enrichment might provide the mechanism for filling in the gaps in the parties’ bargain, it ought not be used as a way of undermining the bargain between them.”⁴

Turning then to the elements of a claim for unjust enrichment, the court disagreed with TPL that any benefit had been provided to Volta, or that any such benefit had caused TPL to suffer any loss. The court held that TPL had not given up a benefit of economic value as TPL did not give away its non-exclusive licence to the planning documents and to the extent rights in the connection offers were transferred, a payment was made by Volta. The court also disagreed that any such enrichment, if established, was unjust, since it was not prepared to read into the option agreement some underlying condition that the basis (or joint understanding) of Volta’s right to retain the benefit(s) was conditional on a success fee of GBP800,000 being payable in the circumstances.

Furthermore, even if unjust enrichment had been established, the court considered that Volta would have been able to successfully argue in its defence that it would be inequitable to require it to make restitution since it had entered into another transaction in reliance on its position.

Implied terms

In respect of implied terms, the court considered the business efficacy and obviousness tests – ie whether it can be said that (a) the contract lacks commercial and practical coherence without reading in the implied terms in question; and/or (b) that the terms are so obvious that they go without saying. The court found that:

• no implied terms were necessary to give business efficacy to the option agreement, as the agreement was well capable of taking effect in accordance with its terms, and there was no commercial or practical incoherence which required rectifying; and
• to imply TPL's proposed terms under the obviousness test would have been "wholly unrealistic"⁵ since this would have created a scenario whereby Volta was required to accept a liability of GBP800,000 for any use of “Assets” after the expiry of the option period, regardless of the value of those assets.

For the above reasons, the court refused to imply the terms requested by TPL.

Comment

The case underlines the importance of clear drafting, which, whilst always essential, is perhaps all the more so in the current volatile energy market.

It is paramount that any option agreement provides certainty, notwithstanding the flexibility often associated with such agreements. To achieve this, parties should consider the range of scenarios which might occur and whether the operative provisions of the option are intended to be engaged in such scenarios. For example, in this case, if the definition of “Assets” had been broader, such that it could be said to include rights with respect to the connection offers, the outcome may have been more favourable to TPL and less favourable to Volta. The key is to ensure that the drafting accurately reflects the intention of the parties when entering into such agreements.

Moreover, if TPL had intended Volta to cease using the defined assets after the expiration of the option period and, if not, to pay a fee for doing so, express wording should have been included to that effect. This would avoid the need for reliance on implied terms, which is often an uphill battle for parties seeking to rely on such terms, particularly in circumstances where contracts have been drafted by sophisticated commercial parties.

¹[2022] EWHC 338 (Comm).
²[2022] EWHC 338 (Comm) at [68.i)a)].
³[2022] EWHC 338 (Comm) at [67] and [139].
⁴[2022] EWHC 338 (Comm) at [210].
⁵ [2022] EWHC 338 (Comm) at [263].