The recent judgment in Phones 4U Ltd (in administration) v EE Ltd  EWHC 49 (Comm) has highlighted the need for care when communicating the reasons for terminating a contract. In this case EE, as a result of failing to identify a repudiatory breach as the grounds for terminating its trading agreement with Phone 4U, was precluded from later pursuing a common law claim for damages.
Phones 4U had been appointed under a trading agreement with EE to act as an intermediary in the sale of EE’s products and services. The trading agreement included two options for termination. The first option, which arose pursuant to clause 14.1.1, gave parties the right to terminate if there had been a material breach of the contract. The second option, contained in clause 14.1.2, gave parties the right to terminate in the event insolvency proceedings were commenced.
In September 2014, the board of Phones 4U resolved to appoint an administrator and subsequently ceased trading. Shortly afterwards, EE notified Phones 4U that it had terminated its trading agreement with Phones 4U a year short of expiry. EE’s termination notice specified clause 14.1.2 as the grounds for termination, and included a proviso that “nothing herein shall be deemed to constitute a waiver of any default or termination event, and EE hereby reserves all rights it may have under the Agreement”.
Following EE’s termination, Phones 4U made a claim for unpaid commission fees. By counterclaim, EE sought over £200 million in “loss of bargain” damages at common law alleging that, in repudiatory breach of its contractual obligations under the trading agreement, Phones 4U had failed to engage in its normal trading activities as authorised seller of EE products and services.
The parties agreed that the appointment of administrators by Phones 4U gave EE the right to terminate the trading agreement under clause 14.1.2, and that such appointment was not, in itself, a breach of contract. Deliberations instead centred around whether, having terminated the trading agreement under the contractual mechanism set out in clause 14.1.2, EE could now claim for common law damages resulting from a termination for repudiatory breach as envisaged in clause 14.1.1.
The court decided that it could not. Baker J explained that, in its termination notice, EE had exercised its contractual right to terminate pursuant to clause 14.1.2 only, and did not identify any breach of contract by Phones 4U as having relevance to its decision to terminate, even though such a breach in fact existed at the time. Baker J ruled that, to make their claim for damages, EE must show that the termination of the trading agreement resulted from a repudiatory breach by Phones 4U – which, according to the termination notice, it did not. As Baker J explained, EE could not now “re-characterise the events after the fact and claim that it terminated for breach when that is simply not what it did”. Moreover, the court ruled that, since the trading agreement had been terminated under clause 14.1.2, EE could not now rely on the proviso in its termination notice reserving its rights. As Baker J put it, “a right merely reserved is a right not exercised”.
Lessons for drafters
The pitfalls for drafters of contractual termination notices are clear. EE’s termination notice defeated its claim for damages because it did not communicate clearly that EE wished to exercise its common law right to terminate for breach. Instead, the termination letter communicated only the contractual termination and did not assert a breach by Phones 4U, even though there was such a breach. Drafters should prepare termination notices with care, paying particular attention to the grounds for termination and the type of remedies sought. As EE found to their detriment, a hastily drafted termination notice can lead to a loss of valuable rights.