Contract termination tips 4 U

15th February 2018

Commercial Dispute Resolution partner Malcolm Simpson explains what parties can learn from the recent Phones 4 U v EE [1] contract termination case.

English law allows termination of a contract:

• On grounds of repudiatory breach (i.e. a breach so serious that it goes to the heart of the contract and gives rise to a right for the aggrieved party to accept the breach, terminate the contract and claim ‘loss of bargain’ damages).
• In cases where the contract does not contain express rights to terminate, on reasonable notice.
• In accordance with the parties’ own express agreement as to the circumstances in, and methods by, which a contract may be brought to an end. Common express contractual grounds for termination include material or substantial breach of any particular terms; where there is a change of control in either party; where there has been damage to reputation; in the event of a party’s insolvency; and/or simply without any reason or cause but on notice.

Sometimes more than one of these rights to terminate will exist concurrently, and Phones 4 U v EE confirms that parties may now have to be more careful than ever in such cases, when seeking to terminate their contracts.

EE, no ‘loss of bargain’ damages 4 U

In September 2014 EE informed Phones 4 U that it would not be renewing its agreement for Phones 4 U to sell EE mobile phone contracts when the agreement expired the following year. Phones 4 U then went into administration.  Under the express termination provisions in the parties’ agreement, the appointment of administrators was not a breach of contract, but it allowed EE to terminate immediately, which EE did.  In those circumstances, however, Phones 4 U remained entitled to receive payments generated from EE contracts which it had sold, and Phones 4 U brought a claim against EE for unpaid commission.

EE counter-claimed that Phones 4 U’s cessation of trading amounted to a repudiatory breach of the parties’ agreement. EE argued that that gave EE both a right to terminate and also the right to recover loss of bargain damages in respect of revenue that EE would have received during the remainder of the term of the agreement had Phones 4 U continued to trade.

The High Court gave EE short shrift and struck out EE’s counter-claim because:

• In a claim for loss of bargain damages, the repudiatory breach must have caused the innocent party’s decision to terminate. If the decision to terminate was independent of a repudiatory breach, any claim for loss of bargain damages must fail.
• EE’s termination notice clearly stated that the agreement was terminated in accordance with the express contractual clause which provided for termination in the event of a party’s insolvency. The notice did not mention any repudiatory breach at all.
• If a termination notice communicated a decision to terminate under an express provision irrespective of any breach, then no right to recover damages for repudiatory breach could arise even if conduct amounting to repudiatory breach, in fact, existed.
• It could not be said that the agreement in this case was terminated on grounds of repudiatory breach. EE could not re-characterise events after the fact, and so EE had no right to loss of bargain damages.
• EE’s termination notice sought, in very general terms, to “reserve all rights and remedies [EE] may have under [the] Agreement“. Such a general reservation was not sufficient to overcome the fact that the notice had unequivocally terminated pursuant to an express right independent of any breach.

WM Comment

In her article on the service of notices, Gwendoline Davies has highlighted some of the technical difficulties that can arise when serving any legal notice.  All of those issues equally apply when a party issues any termination notice.

In addition, the Phones 4 U v EE case illustrates that when a repudiatory breach is committed, the innocent party can opt to accept the breach, end the contract and potentially claim loss of bargain damages.  It is therefore always crucial, if and when any party considers terminating a contract for any reason, to ascertain exactly what rights that party has, and to prepare the termination notice sufficiently carefully so as to protect and/or assert those rights accordingly.

Other traps for the unwary in contract termination scenarios can include the risk of affirmation (i.e. that the right to terminate can be lost, even inadvertently, in certain circumstances where a party commits to keep the contract alive); the risk of estoppel (for example, where one party has led another to believe it will not terminate and then circumstances dictate that it would be unjust to allow that party to go back on its word); and the significant risk of purporting to terminate a contract when the right to do so has not arisen, which risks putting the innocent party in repudiatory breach of contract, with a consequent liability for loss of bargain damages.

Any party considering terminating any commercial contract in the UK should seek specialist advice. As well as ensuring that you have the most appropriate and effective overall exit strategy, a UK commercial dispute resolution solicitor will be able to guide you through the traps which can arise both within the contract itself and in contract and common law generally.

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[1] [2018] EWHC 49