13 September, 2018
Phones 4U Ltd (in Administration) v EE Ltd [2018] EWHC 49 serves as a reminder of the care that needs to be taken when drafting notices to terminate contracts. In this case, the Defendant’s counterclaim for damages for loss of bargain, based on a repudiatory breach, failed because when the Defendant exercised its contractual right to terminate the contract (based on the fact that administrators had been appointed over the Plaintiff) its notice of termination made no mention of any actual or anticipatory breach, even though a repudiatory breach did in fact exist at that time.
England’s High Court held that the Defendant had stated unequivocally in the termination notice that it was terminating pursuant to its contractual right to do so and not for repudiatory breach and the Defendant’s counterclaim for damages for loss of bargain was therefore unsustainable. The Court also held that a provision in the termination notice stating that the Defendant was not waiving any breach that may exist and was reserving all rights in that regard did not assist because the Defendant had not purported to exercise those rights in the notice.
Background
This case involved a retailer of mobile phone contracts, Phones 4U, and a mobile network operator, EE. Phones 4U had entered into a Trading Agreement with EE under which EE would pay Phones 4U commission or revenue shares for selling mobile phone contracts to customers. Clause 14.1.1 of the Trading Agreement entitled either party to terminate the Trading Agreement if the other party committed a material breach of the Trading Agreement and, either such breach was incapable of remedy or, if capable of remedy, had not been remedied to the reasonable satisfaction of the other party within 30 days of a written request from the other party to remedy it. Clause 14.1.2 of the Trading Agreement allowed either party to terminate the agreement if the other party was unable to pay its debts or took any steps to initiate a composition or scheme or other arrangement with any of its creditors.
On 12 September 2014, EE notified Phones 4U that it would not renew the Trading Agreement when it expired. The board of directors of Phones 4U met that afternoon and resolved to seek the appointment of administrators and on 15 September 2014 it ceased trading. On 17 September 2014, EE sent a letter to Phones 4U stating that it was terminating the Trading Agreement with immediate effect, in accordance with Clause 14.1.2. EE also stated in the letter that “…nothing herein shall be deemed to constitute a waiver of any default or termination event, and EE hereby reserves all rights and remedies it may have under the Agreement”.
It was common ground that the appointment of administrators on 15 September 2014 was not a breach of contract on Phones 4U’s part, but did entitle EE to terminate the contract under Clause 14.1.2 of the Trading Agreement. It was also common ground that EE’s liability to Phones 4U in respect of revenue generated from EE contracts sold by Phones 4U survived termination.
The administrators for Phones 4U brought proceedings against EE for unpaid commission fees that were due under the Trading Agreement when it was terminated. EE counterclaimed for loss of bargain i.e. for the financial loss it would suffer as a consequence of the Trading Agreement ending early. EE argued that Phones 4U was in repudiatory breach by ceasing to trade. Phones 4U applied for summary judgment to dismiss EE’s counterclaim on the basis that EE had (as per its termination letter) terminated the Trading Agreement solely by reference to clause 14.1.2 of the Trading Agreement and not in response to Phones 4U’s alleged repudiatory breach.
Decision
The Court granted summary judgment and dismissed the counterclaim. The Court held that for a party to successfully make a common law claim for damages for loss of bargain, it had to show that its termination of the contract creating the loss of bargain resulted from repudiatory breach or renunciation and was made by the exercise of its common law right to terminate for that breach or renunciation. The Court held that even where conduct later alleged to be a repudiation at common law was cited as the factual basis for a termination based on a contractual provision, it might be that the innocent party could not rely on the repudiation at common law as having led to its decision to terminate.
The Court found that EE’s termination letter only communicated that EE was terminating under its contractual right to do so under clause 14.1.2 of the Trading Agreement and not for breach. Although there was a reservation of rights in the letter, the Court held that “a right merely reserved is a right not exercised”. Even if there was a real prospect of proving that the Trading Agreement had been breached, Phones 4U had not been notified that the termination was for breach. Therefore, it did not matter, the Court said, whether EE could have terminated for other reasons. Accordingly, EE’s counterclaim for damages for loss of bargain based on repudiatory breach was not sustainable in law.
Comment
This case highlights the importance of careful consideration where a contractual right to terminate a contract arises. Consideration should be given as to whether there are also any other grounds for terminating the contract and what needs to be done in order to preserve the remedies for such.
Where, as in this case, there is also a common law right to terminate the contract for repudiatory breach, the repudiatory breach must be stated as grounds for terminating the contract in the termination notice, failing which a claim for damages for repudiatory breach may well be precluded.
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