In Phones 4U Ltd (In Administration) –v- EE Ltd  EWHC 49 (Comm), the High Court ruled that EE's counterclaim for damages for loss of bargain had no real prospect of success on the basis that the terms of a termination letter sent by EE were effective in terminating the relevant contract only in exercise of its right under a contractual provision and not in the acceptance of an alleged repudiatory breach by Phones 4U under common law.
Prior to its entry into administration in September 2014, Phones 4U was a well-known distributor of mobile phone contracts from mobile network operators to end users and EE was and remains one of the major mobile network operators in the UK.
As at September 2014, the primary trading relationship between Phones 4U and EE in relation to "pay monthly" contracts was governed by a written agreement dated 8 October 2012, which was set to run until 30 September 2015 (the Trading Agreement). In addition, the terms of business for "Pay As You Go" connections were agreed separately by emails in October 2013, which were set to run until 31 December 2014 (the PAYG Terms). The PAYG Terms were "additional terms" as contemplated by the Trading Agreement and therefore the termination provisions of the Trading Agreement applied also to the PAYG Terms.
From 2012 onwards, Phones 4U’s business began to decline and on Friday 12 September 2014, EE notified Phones 4U that it would not renew or replace the Trading Agreement when it expired on 30 September 2015. The Board of Directors of Phones 4U met that afternoon and resolved to seek the appointment of administrators. On the morning of Monday 15 September 2014, administrators were appointed, Phones 4U's retail shops and outlets did not open for business and online trading was suspended. That cessation of trading turned out to be permanent.
At around 1pm on Wednesday 17 September 2014, EE sent a termination letter (the Termination Letter) to Phones 4U's administrators, which stated that "[i]n accordance with clause 14.1.2 of the [trading] Agreement, we hereby terminate the Agreement with immediate effect" and contained general reservation of rights language at the end.
It was common ground that while the appointment of administrators on 15 September 2014 was not, in itself, a breach of contract on the part of Phones 4U, it did entitle EE to terminate the contract under the clause 14.1.2 of the Trading Agreement as invoked by EE in the Termination Letter.
Phones 4U commenced a claim against EE for payment in respect of revenues generated from EE contracts sold by Phones 4U, which survived the termination of the Trading Agreement. EE counterclaimed for damages for the loss of bargain resulting from the termination of the Trading Agreement, asserting losses of over £200 million.
Phones 4U applied for summary judgment under CPR Part 24 on EE's counterclaim on the basis that it had no real prospect of success and that there was no other compelling reason why the counterclaim should be disposed of at a trial.
EE's counterclaim was founded on an alleged obligation on the part of Phones 4U, in essence, to market and to sell EE's products and services (the Key Obligation). For the purposes of the summary judgment application, the existence and scope of the Key Obligation fell to be assumed as alleged by EE.
Therefore, the issues for determination (and in each case, whether EE had a real prospect of success or other compelling reason for trial) were:
1. Was there a breach of the Key Obligations which was sufficiently serious so as to make it a repudiatory breach1?
2. Alternatively, was there a renunciation2 by Phones 4U?
3. Did the terms of EE’s Termination Letter defeat any claim by EE for damages for loss of bargain?
Phones 4U failed on the first two issues.
On repudiatory breach, on the face of it, there was a breach by Phones 4U of the Key Obligation by ceasing business activities on 15, 16 and 17 September 2014. The key question therefore was whether the breach was sufficiently serious to have deprived EE substantially of the whole benefit of the contract.
It was fanciful to suggest that the 2 ½ days of breach until termination had that effect, where the Trading Agreement and the PAYG Terms had over a year and 3 months, respectively, to run. However, it was debatable whether that was the correct test. EE argued that it was sufficient at the time of termination for there to have been reasonable grounds for concluding that a breach would be likely to continue (or be repeated) until (or such that) substantially the whole benefit of a contract would be lost. This was a forward looking, as opposed to a static, test.
Mr Justice Baker appeared to be sympathetic to EE's position and decided that both the determination of precise formulation of the forward looking test, as well as whether the test had been met in this case, required detailed factual findings. This made the issue inapt for summary determination.
Given the judge's finding on repudiatory breach, it was not necessary to deal with the issue of renunciation for the purposes of the application. However, the judge noted the different test that applied to renunciation, i.e., whether Phones 4U had conducted itself and/or communicated with EE so as to make it unequivocally to appear to EE that Phones 4U intended no longer to honour its contractual obligations. He went on to give a very strong indication that he was not convinced by EE's case on this point, without going so far as to make a binding finding on the issue.
The Termination Letter
Phones 4U argued that even if it had repudiated or renounced the contract by the time the Termination Letter was sent, in circumstances where:
1. it was common ground that the appointment of an administrator did not constitute a breach of contract but gave EE a contractual right to terminate under clause 14.1.2 of the Trading Agreement;
2. the Termination Letter expressly purported to exercise that right; and
3. the Termination Letter did not identify any breach of contract or renunciation by Phones 4U as causing, justifying or having relevance to its decision to terminate, whether by asserting breach or renunciation in terms or by referring to or asserting facts that were now said to have amounted to breach or renunciation,
the terms of the Termination Letter rendered unsustainable in law a claim for loss of bargain damages premised upon a repudiatory breach or renunciation.
Mr Justice Baker agreed. Following a detailed survey of the authorities, he concluded that EE was required to show that the termination of the contract, which created the loss of bargain, resulted from the repudiatory breach or renunciation by Phones 4U, which in turn required EE to show that the contract was terminated by its exercise of its common law right to terminate for that breach or renunciation.
If EE instead voluntarily terminated the contract under a contractual option independent of any breach, then any future loss of bargain arising out of the termination should be seen as caused by EE itself, rather than by any breach by Phones 4U.
Upon a proper construction of the Termination Letter, the judge found that it communicated clear a decision to terminate only under clause 14.1.2 of the Trading Agreement that had arisen irrespective of any breach and it could not be said that the contract was terminated for breach. Therefore, EE's claim for damages for loss of bargain at common law could not be sustained.
The generic, catch-all reservation of rights language at the end of the Termination Letter added little, if anything at all. The earlier part of the letter had already expressly, and lawfully, terminated the contract: there was no point in purporting to reserve a right which no longer exists.
The key lesson for an innocent party faced with a counterparty's (potential) breach is clear to see. In the present case, by electing to terminate under a contractual provision, EE effectively extinguished any right to damages for loss of bargain, which has proved to be potentially extremely costly. The Courts will pay close scrutiny to the exact terms of any termination or notice in determining its precise legal effect. Therefore a party should, from the outset, consider very carefully all potential rights and remedies it may have and whether they are cumulative or mutually exclusive before making a decision and communicating it to the counterparty so as to prevent inadvertently losing any rights or remedies it may later wish to rely on.
Finally, from a procedural perspective, this is a rare instance of a successful summary judgment application in a case other than a relatively straightforward or an uncontested one. An application for summary judgment is not without its risks: it can be costly, especially if it is heavily contested, and where unsuccessful, an applicant might find itself bound by unhelpful findings from the application, which it might have preferred to have been determined at full trial with the benefit of the full evidence and context. However, as this case shows, the rewards of a successful application can be great: if the decision is not overturned on any appeal, Phones 4U will have knocked out a £200 million counterclaim, along with making substantial savings in costs and time that would otherwise have been expended on that counterclaim.
The full text of the judgment is available at http://www.bailii.org/ew/cases/EWHC/Comm/2018/49.html