The unclear language governing termination rights is subject to interpretation and extraordinary financial risk.
How does one determine the value of power contracts under early termination? Given the vagaries of the contracts themselves, the process is neither clear nor standard, and often results in protracted and costly litigation. In a previous article, we had assumed that termination already had occurred (“Mastering the Mastering Agreement,” May 2005). But there is an even more basic question: Did the counterparty have the right to terminate in the first place?
Several recent cases have highlighted that termination can be a tricky business and is definitely not as straight forward as it would seem. The cases in-volve not just the valuation of the terminated portfolio but the legality of the terminations themselves. Although the exact details of each case are different, they do share at least one thing in common: the circumstances of each firm prior to termination and the assurances offered factored into the litigations and were central to the disputes. Given the relevant contractual language, this is to be expected.