When faced with a default by a borrower, the lenders should not rely solely on the "non-waiver" clause in the contracts in safeguarding their rights.
In Tele2 International Card Company SA and others v Post Office Limited  EWCA Civ 9, the English Court of Appeal considered the effectiveness of a "non-waiver" clause in a breach of contract dispute where the aggrieved party was entitled to terminate the contract, yet did not do so until nearly one year after the breach.
Contrary to the common assumption that a "non-waiver" clause can remove the aggrieved party's obligation to elect whether to terminate or affirm a contract following another party's material breach, it was held that such clause is "of no particular help" other than to emphasise that an election must be clear and unequivocal. In other words, a "non-waiver" clause may not guarantee protection of a party's right to terminate for breach.
Tele2 International Card Company and its subsidiaries (Tele2) entered into an agreement to supply the UK Post Office Limited (POL) with phone cards (Agreement). Under the Agreement, Tele2 was required to provide POL with an annual parent company letter as an guarantee that Tele2 would be given sufficient capital to perform the Agreement.
Tele2 failed to provide the Letter for the calendar year 2004 by the prescribed deadline. This amounted to a material breach which entitled POL to terminate the Agreement. Despite being aware of Tele2's breach, POL however did not terminate the Agreement immediately. Rather, POL continued to perform its contractual obligations until nearly one year after the occurrence of the breach when POL then decided to give notice to Tele2 and to terminate the Agreement.
Tele2 argued that POL's conduct, such as its continued performance of the contract, lack of protest as to Tele2's breach and delay in terminating the Agreement, constituted an election to affirm the Agreement (ie. a waiver). POL sought to rely on a "non-waiver" clause in the Agreement, which essentially stipulated that no delay in enforcing any provisions would be deemed to be a waiver.
In determining whether POL was entitled to terminate the Agreement, the central issues in this case are:
- whether POL's conduct constituted an election to affirm the Agreement; and
- whether the "non-waiver" clause could be interpreted so as to relieve POL of its obligation to make an election in the event of Tele2's breach.
The Court stated that whether an election existed was a question of fact. In this case, POL's significant delay and continued performance of the contract without any protest was held to be an affirmation of the contract, ultimately meaning it had forgone its right to terminate.
It was also confirmed that a "non-waiver" clause does not remove the obligation of the aggrieved party to make an election, rather it was held that such a clause was "of no particular help" other than to emphasise that an election must be clear and unequivocal. Indeed, what is needed is for a party to act reasonably to protect its right and to avoid conduct which may be deemed as an affirmation of the contract or waiver of its rights.
The impact of the decision for lenders
When faced with a default by a borrower, the lenders should not rely solely on the "non-waiver" clause in the contracts in safeguarding their rights. This is because the lenders' conduct after the breach by the borrower may be taken as a waiver (or affirmation), albeit the existence of a "non-waiver" clauses in the loan documentation.
For this reason, it is advised that the lenders should always take further steps, such as issuing a reservation of rights letter, in order to avoid any potential waiver by election claim against them.
While not tested in the courts yet, some commentators have suggested that lawyers could draft clauses that explicitly and more precisely exclude the doctrine of election.
It is also worth noting that although Tele2 is an English precedent which is not binding on Australian courts, it is likely to be considered and followed in Australia as a persuasive authority.
Further Australian examples
Some interesting Australian decisions relating to waiver by election or "non-waiver" clauses include:
- In Kostopoulos v G E Commercial Finance Australia Pty Ltd  QCA 311, the lender's receipt of interest payments following the borrower's material breach were found not to be a waiver. In that decision, Justice Keane made a remark that "It may be accepted that a non-waiver clause may itself be waived by conduct", suggesting that the Australian courts share the same opinion as the judges in Tele2.
- In Agricultural and Rural Finance Pty Ltd v Gardiner and Another (2008) 251 ALR 322, the Court held that the lender's acceptance of late interest payments (which was a default on the part of the borrower) did not constitute a waiver of the requirement for "punctual payment". It was concluded that while two inconsistent rights existed for the lender to choose between accelerating the loan or accepting payment late, the fact that the lender accepted late interest payments did not mean it had waived the borrower's breach for failing to pay interest punctually.
- In Summer Hill Business Estate Pty Ltd v Equititrust Ltd  NSWCA 149, Justice Macfarlan stated that when a lender was faced with inconsistent rights and required to make an election, a reservation of rights would likely to be ineffective because an exercise of one right "usually constitutes an election not to exercise the other, whatever reservation might have been made". It is however emphasised that if the time has not arrived at which an innocent needs to make an election, it may "keep its position open" by avoiding act that may be deemed as an unequivocal decision to elect.