Phones 4U Limited -v- EE Limited: sailing away from typical contractual termination principles

In this case, the High Court considered an application for a summary judgment under CPR Part 24 to dismiss the defendant’s counterclaim for damages for the loss of bargain resulting from the termination of a trading agreement brought to an end pursuant to a contractual term.

Factual background

On 12 September 2014, EE (the fourth mobile network operator to terminate) informed Phones 4u (a retailer of mobile phone contracts) that it would not renew its trading agreement with Phones 4u when it expired on 30 September 2015. The board of directors of Phones 4u then met in the afternoon and resolved, inter alia, to seek the appointment of administrators. The appointment of administrators gave rise to a right for EE to terminate the trading agreement (Section 14.1.2).

On 15 September 2014 Phones 4U suspended its trading operations on a temporary basis. This then became permanent. Two days later, EE sent a letter to Phones 4u.

The letter read as follows:

‘We refer to the agreement [i.e. the trading agreement].

In accordance with clause 14.1.2 of the 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…

Nothing in this notice shall be construed as a waiver of any rights EE may have with respect to the agreement… Without limiting the generality of the previous sentence, 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…

This notice is governed by English law.’

Notwithstanding the termination, Phones 4u remained entitled to payments in respect of revenue generated from EE contracts which had been sold by Phones 4u, estimated to reach approximately £120 million. EE sought to extinguish this claim by counterclaiming over £200 million on the basis that there had been a repudiatory breach of Phones 4u’s key obligations under the trading agreement. Phones 4u disputed the quantum and applied for summary judgement under CPR Part 24 to strike out EE’s counterclaim.

Legal issues

Andrew Baker J was asked to determine whether EE’s counterclaim had a real prospect of success or if there was some other compelling reason for a trial. The judge identified four main issues to be determined and these were:

i) Was there a breach by Phones 4u?
ii) If so, was it a repudiatory breach, (a) of a condition, or (b) which was sufficiently serious to justify termination?
iii) Alternatively, was there a renunciation by Phones 4u?
iv) Did the terms of EE’s termination letter defeat any claim by EE for damages for loss of bargain?

The judge held that the first two issues could not be disposed of summarily and would have to go to trial. On that basis he did not consider it necessary to decide the third issue. He then proceeded to give judgment on the fourth issue. The judge referred to the terms of the wording of EE’s termination letter summarised as follows: 

i) a right to terminate, without breach on the part of Phones 4u existed under the trading agreement;
ii) that right was expressly exercised; and
iii) at the time of the termination no mention was made of any breach.

The judge stated that this was a ‘pure point of principle’ and reviewed at length the authorities on whether a claim for damages for loss of bargain was necessarily bad in law given the terms of the termination letter. He followed Lonsdale -v- Leofelis [2012] EWCA Civ 985. In that case, at first instance and on appeal the court held that the party who had terminated a contract for a bad reason and ceased performing leading the other party to terminate for repudiation could not then claim damages when it, subsequently, discovered other grounds which, if it had known about them, would have entitled it to terminate.

Also, the case of Boston Deep Sea Fishing & Ice Co -v- Ansell [1888] 39 Ch D 339, which held that a party purporting to terminate may defend a wrongful termination claim on the basis that, at the time of termination, the other party was guilty of repudiation, whether or not then known by the party terminating, was distinguished. The principle in Boston would give rise to a defence, but not to a cause of action.

The judge found that EE’s termination letter communicated unequivocally that EE was terminating in exercise, of, and only of, its right to do so under clause 14.1.2 of the trading agreement, a right independent of any breach. This was not saved by the reservations in the letter. Andrew Baker J remarked that ‘a right merely reserved is a right not exercised’ and emphasized  that 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. Nor could it say that it treated Phones 4u’s renunciation (as alleged) as bringing the contract to an end when that, again, is just not what happened.

Comment

This High Court case serves as a warning that great care should now be taken in the drafting of a termination notice, where a contractual right to terminate has accrued, but there is also (or might be) a common law right to terminate for repudiatory breach, so as to ensure that any common law damages claim is preserved.

In his judgement, Andrew Baker J suggested that it will not be sufficient to ‘reserve rights’ in general terms.

Evidently, this decision may have important implications from a shipping perspective for those looking to terminate charterparties, construction contracts and ship sale and purchase contracts where there is a common law and a contractual right to terminate.

This article originally appeared in the February 2018 edition of shipping case digest. Other articles include:

Glencore Energy UK Ltd and Glencore Ltd -v- Freeport Holdings Ltd [2017] EWHC 3348 (comm)

Lukoil Asia Pacific PTE Limited -v- Ocean Tankers (PTE) Limited [2018] EWHC 163 (Comm)