Phones 4U Ltd (in administration) v EE Ltd  EWHC 49
Failing to exercise care in drafting termination letters at the time of termination may block large claims after termination. The terminating party in Phones 4U Ltd discovered this as the High Court ruled a termination letter did not entitle it to damages for loss of bargain – despite repudiatory breach – as that letter relied solely on a contractual termination right.
Phones 4U fell into financial trouble in 2014, with mobile phone operators Three, O2 and Vodafone all deciding to stop selling their phone contracts through the retailer.
On 12 September 2014, EE told Phones 4U that it would not renew its Trading Agreement with Phones 4U.
With EE as one of its last mobile operators, Phones 4U continued trading on 13 September 2014.
On the morning of 15 September 2014, Phones 4U appointed administrators, ceasing trading online and in stores. Customers hoping to browse Phones 4U's website on 15 September 2014 were greeted with a message explaining why Phones 4U was offline, referring to EE, accompanied by a ‘sad face’ emoji. EE would later allege that this message amounted to a false or misleading representation.
On 17 September 2014 at 1.21 p.m., EE sent a letter to Phones 4U (the “Termination Letter”). It stated that “In accordance with clause 14.1.2 of the [Trading] Agreement, we hereby terminate the Agreement with immediate effect. As a result, we hereby terminate with immediately [sic.] effect your authority to sell and promote all EE products and services contemplated by the Agreement..."
Clause 14.1.2 of the Trading Agreement was a standard insolvency provision. It entitled EE to terminate should Phones 4U appoint administrators
EE sought to put itself in the position it would have been had Phones 4U been able to perform its Trading Agreement obligations, claiming £200m in damages for loss of bargain arising from Phones 4U's breach. Phones 4U applied to have this claim decided summarily claiming EE had no real prospect of success at trial.
EE had to show that it had a real prospect of success in proving:
- Phones 4U breached the Trading Agreement; and that
- the breach was serious enough for EE to treat the Trading Agreement as discharged (i.e. a repudiatory breach); and that
- the terms of the Termination Letter did not defeat EE’s subsequent damages claim for loss of bargain.
On the three key issues, Barker J found as follows:
- EE had a real prospect of establishing breach. Under the Trading Agreement, Phones 4U had a clear obligation to carry out key activities relating to the sale of EE phone contracts. It was at least arguable that by ceasing trading on 15th, 16th and the morning of 17th September 2014, Phones 4U breached these obligations.
- On whether this beach was serious enough to be repudiatory, EE also had a real prospect of success. The issue at trial would come down to whether the 15 September 2014 cessation of trading could objectively be seen as likely to continue for a sustained period. If so, this could indeed deprive EE of the substantial benefit of the Trading Agreement, as to amount to a repudiatory breach. This question, Baker J noted, required "full disclosure ... factual evidence ... and ... experts" at trial.
- Yet, whilst it was arguable that there was a breach by Phones 4U, and that this breach was repudiatory (thereby giving EE the common law right to terminate and seek damages for loss of bargain), it could not be said that EE's termination – the Termination Letter – was exercised as a result of a repudiatory breach. After analysing various related cases, Barker J ruled it bad law to claim for loss of bargain resulting from repudiatory breach, if, at the time of termination, such a breach was not communicated as the basis for termination. EE's termination was clearly carried out relying on clause 14.1.2, an express contractual right to terminate should Phones 4U enter administration. As a “pure point of principle” EE could not then reconstruct the facts as termination for repudiatory breach instead.
Analysis: The need for careful drafting in Termination Letters
Baker J's finding displays that termination letters must be extremely clear when communicating the legal basis for termination. When suppliers or counterparties get into financial difficulty, and the other party chooses to terminate "in accordance with [a named clause] of the Agreement", such a termination, is, of course, a legitimate contractual termination. However, before jumping straight to contractual termination provisions the terminating party must also consider alternative rights and remedies under common law – and whether all are compatible, complimentary or clashing with one another. As EE found, those terminating pursuant to an express contractual provision cannot then "re-characterise the events after the fact and claim [termination] for breach when that is simply not what it did". Failing to exercise care in drafting termination letters at the time of termination could lead to the failure of large claims after termination, leaving you sad-faced.