Energy: Consequences of not exercising an option

International

In Thurcroft Power Limited v. Volta Energy Group Limited [2022] EWHC 338 (Comm), the Commercial Court decided that an option agreement concerning the early stages of a battery storage development did not prevent the parties from using assets acquired as party to the project when the option was not exercised. 

The dispute between the parties highlights the need for clarity in approaching option agreements in the energy sector (and perhaps even more so in a volatile market).

Facts

The Claimant, Thurcroft Power Limited (“TPL”), was a special purpose vehicle incorporated to pursue the initial stages of the development of a battery storage project in Thurcroft, Yorkshire (the “Project”). The Defendant, Volta Energy Group Limited (“Volta”), was a company delivering battery storage projects. Battery storage facilities are a collection of high-power batteries used to store electrical energy taken from the National Grid for later release.

TPL leased the proposed site and had planning documents prepared.  Volta funded the payments to the local grid company, Northern Powergrid (the “Grid”), payable upon acceptance of its “Connection Offers”.  The initial intention of the parties was that Volta would develop the battery storage facility itself and it was agreed that the legal interest in an initial Connection Offer should be transferred to Volta.

Later on, TPL and Volta entered into an option agreement relating to the transfer of the “Assets” of TPL to Volta (the “Option Agreement”).  It provided for a “price” payable to TPL of £800,000 on the exercise of the option. In a side letter to the Option Agreement, TPL allowed Volta to enter the site to perform surveys.

The option granted by the Option Agreement expired (Volta did not exercise the option).  Volta did not develop the battery storage facility and instead proceeded to sell certain rights to a third party. Those rights included an application for planning permission made by Volta and the benefit of the initial and later Connection Offers (to the Grid).

TPL claimed that Volta should have accounted to it for the sale proceeds to the third party and/or that Volta had breached an implied term of the Option Agreement to cease to use the “Assets” when the option term expired.

There was also a question whether “Assets” under the Option Agreement covered the Connection Offers in the first place. The front sheet of the agreement described the option as “relating to planning documents relating to land [description of land/location]”. The agreement itself defined “Assets” as “assets of [TPL] relating to the Storage Project, which are at the date of this Agreement or subsequently, owned by [TPL] and which include all assets in relation to the Storage Project”.  Both parties accepted that the initial planning documents were the subject of the Option Agreement, but Volta disputed that the Connection Offers were also included.

Issues to be determined

The issues to be determined were:

  1. whether the definition of “Assets” in the Option Agreement extended to anything more than TPL’s rights in respect of the planning documents or whether the definition also extended to TPL’s rights in respect of the Connection Offers;

  2. whether Volta had been unjustly enriched as a result of the transfer of TPL’s rights to Volta in respect of the Connection Offers and the use of drawings underlying planning permission for the Project; and

  3. whether the Agreement was subject to an implied term that after the expiry of the option period Volta would cease using any assets which it had been using for the Project with the result that, being in breach of that requirement, Volta would be liable to pay to TPL the £800,000 price.

Decision

Definition of Assets

This was a matter of contractual interpretation. 

The title of an agreement had a similar status as headings for the purposes construing an agreement.  It was also “an important consideration” that prior to the entry into the Option Agreement the parties had agreed that the legal interest in the initial Connection Offer should be transferred to Volta. This was because, if the legal interest had passed to Volta, then there would be no need for the Option Agreement to deal with it because the benefit of it would have already passed to Volta.

The Commercial Court found that the definition of Assets in the Option Agreement did not extend to TPL’s interests in respect of the Connection Offers.

Unjust enrichment

The Commercial Court considered the four elements of an unjust enrichment claim identified in Beneditti v Sawiris [2013] UKSC 50: (i) has Volta been enriched; (ii) was the enrichment at TPL’s expense; (iii) was that enrichment unjust; and (iv) is there a defence.

Taking the first two elements, the Commercial Court found that despite TPL’s case that the benefit to use the planning drawings was by way of licence, no such benefit was in fact conferred by TPL on Volta. It was held that TPL did not give away its non-exclusive licence to the planning documents and so TPL did not suffer any loss.

The unjust factor in respect of the third element was argued by TPL to be “a failure of basis” (i.e. where a transfer of value had been made both voluntarily and conditionally, and the condition for its retention by the recipient had failed). In light of the above findings, the point did not arise but, if the Commercial Court was wrong, it considered that it could not be a “basis” of the Option Agreement that, if Volta proceeded with the project, the £800,000 would be payable even where events transpired which were envisaged neither by the Option Agreement nor by the parties.

Even if the first three elements of unjust enrichment had been established, Volta would have been able to rely on the change of position defence, as it would be unequitable to require Volta to make restitution.

Therefore, TPL failed to establish its claim in unjust enrichment.

Breach of implied terms

The Commercial Court considered the principles set out in Yoo Design Services Limited v Ilive Reality Pt [2021] EWCA Civ 560, which provided that a term will not be implied unless, on an objective assessment of the terms of the contract, it is necessary to give business efficacy to the contract and/or on the ‘obviousness’ test.

The Commercial Court accepted Volta’s position that the implied terms contended for were theoretical because the situations in which they could apply do not arise. If no rights were conferred on Volta in respect of the planning documents, then TPL granting permission to make use of the same in the option period and after its expiry was implausible.

In respect of the business efficacy test, it was held that the implication of the terms contended for was not necessary in order to give business efficacy to the Agreement and that the Agreement did not lack commercial or practical coherence if the terms were not implied.

As to the obviousness test, the Commercial Court considered that the term sought to be implied should be “so obvious that it goes without saying” and that this should be considered by reference to the time at which the Agreement was entered in to. The question should not be considered with the benefit of hindsight.

The Commercial Court decided that it could not be said that the parties would obviously have come up with the solution provided by TFL’s proposed implied terms, particularly given that Volta would have been subject to an £800,000 liability for using any Assets after the expiry of the option period irrespective of the value of those assets. This was considered to be wholly unrealistic.

Having failed the business efficacy and obviousness test, it was not possible to imply the terms sought by TFL. Consequently, it was held that there was no breach of contract by Volta.

Comment

Drafting is Key

It is notable that, in entering the Option Agreement, the parties considered (at the time) that Volta would develop the site using the Assets of TPL, which was not, in the end, the case. Put simply, the agreement gave Volta the right, but not the obligation, to call for the transfer of the Assets and that, as the option was never exercised, no option payment ever became due and any enrichment had not been at TPL’s expense.

The Commercial Court’s detailed decision highlights the need for careful drafting to ensure the intention of the parties is accurately expressed, including taking the time to consider, and provide for, the big “what ifs?”. 

Had the option agreement been drafted to include: (a) the relevant Connection Offers within the definition of Assets; and (b) a clause requiring Volta to cease using the defined assets after the expiry of the option period or, in the alternative, pay TPL a success fee, then TPL would have had a much stronger case.

Significance of Option Agreements in the Energy Sector

Options agreements are valuable instruments that are used by energy companies as to limit risk by providing a level of certainty (e.g., price and date of execution of the obligation that underpins the option agreement) and to provide financial flexibility over time. It is therefore imperative that the option agreements are drafted precisely.

There is increased activity in the battery storage market. Since 2017/18, the time in which the events in the present case commenced, the battery storage market has developed and now offers services such as Dynamic Containment, Balancing Mechanisms, Firm Frequency Response, and participation in the Capacity Market. The latest Capacity Market Auction achieved the highest price in T-4 auctions to date (i.e., £30.59/kW/year) with circa 3GW of battery storage assets securing long terms contract for their capacity at this record price, which demonstrates the growth in this market.

Also, given the strength of oil-prices, Oil & Gas M&A activity is expected to hit a multi-year high this year.  Options can be incorporated into M&A deals and, whilst their use is always bespoke, there is often one of two ‘drivers’: (1) for tax reasons, particularly in the U.K.; or (2) commercially where the parties want to create an option to buy or sell – e.g. only a put or only a call.  

Despite the developments in these markets, there remains no “standard form” for option agreements for use in development projects or in the divestment of assets.  The circumstances in which options arise tends to be very fact specific, again highlighting the need for the parties to be objectively clear in the drafting of their agreement.