Termination under a contractual right and acceptance of a repudiatory breach of contract – new rules?

Phones 4U Limited  -v- EE Limited [2018] EWHC 49 (Comm)

This case may change the current requirements for a notice of termination where there are (or might be) both a contractual right to terminate and a common law right to terminate for repudiatory breach.

For example, a time charterparty may give a right for the charterers to terminate if the vessel is off-hire for more than so many days, or a shipbuilding contract if there have been more than so many days’ delay in delivery, regardless of whether the lost time results from a breach of contract by the owners or the yard, but termination under such a provision will not, just as such, give the terminating party a right to damages.

However, it has previously been considered that if the owners or the yard were in fact in repudiatory breach of contract, the contractual termination notice could also be treated as acceptance of the repudiatory breach. On the basis of the acceptance of the repudiatory breach, the terminating party would then be entitled to common law damages for ‘loss of bargain’.

The judgment of Andrew Baker J in this case appears to decide that common law damages will not be available to the terminating party in the absence of specific wording in the termination notice.

It therefore has important implications for those looking to terminate charterparties, construction contracts and ship sale and purchase contracts.

Background

On 12 September 2014, EE (a mobile phone operator) informed Phones 4U (a retailer of mobile phone contracts) that EE would not renew the agreement by which Phones 4U sold contracts with EE, when it expired on 30 September 2015.

In response, Phones 4U went into administration. On 15 September 2014 Phones 4U stopped trading; however, the administrators stated that they intended to resume trading shortly.

The appointment of administrators was not itself a breach of contract but entitled EE to terminate immediately under a provision in the agreement between EE and Phones 4U, and on 17 September 2014 EE did so.

Phones 4U remained entitled to payments in respect of revenue generated from EE contracts which had been sold by Phones 4U. This claim survived EE’s termination of the agreement.

EE sought to extinguish this claim by bringing a counterclaim on the basis that there had been a repudiatory breach of Phones 4U’s key obligations under the agreement.

EE was claiming damages for ‘loss of bargain’ in respect of the revenue which EE would have received if Phones 4U had fulfilled its contractual obligations for the remainder of the period to September 2015.

This was a summary judgment application by Phones 4U to strike out EE’s counterclaim.

Arguments

Phones 4U argued that:

1. ceasing to trade for 2.5 days was not a breach of contract at all, in any event it was not a repudiatory breach under the agreements
2. it was not realistic to suppose that there might be a finding at trial that, as at mid-September 2014, the cessation of trading was likely to continue for long enough to deprive EE of substantially the whole of its remaining bargain
3. EE’s termination letter rendered the counterclaim for loss of bargain damages unsustainable in law

Decision

The judge was not persuaded that EE did not have a realistic prospect of establishing that there was a repudiatory breach on the part of Phones 4U at the time of EE’s termination letter. However, he accepted Phones 4U’s third argument and dismissed EE’s counterclaim.

Basis of the decision

The judge based his decision on Lonsdale -v- Leofelis [2012] EWCA Civ 985. Lonsdale is not a decision on the wording of termination notices but on causation. The point is that in a claim for common law damages for loss of bargain, the terminating party’s loss of the benefit of its bargain must be capable of being treated as caused by the other party’s repudiatory breach. The terminating (innocent) party has a right to choose whether to treat itself as discharged from its bargain. However, when the innocent party so chooses, the law treats the repudiatory breach as causing the loss of bargain. 

This means that the repudiatory breach must have caused the innocent party’s decision to terminate. If a party terminates on the basis of a supposed repudiatory breach which is not subsequently proved, but it is subsequently discovered that the other party had committed a different, actual, repudiatory breach which was not known at the time, then the terminating party will not itself be in breach of contract, but the terminating party will not be entitled to loss of bargain damages because the actual repudiatory breach did not cause the decision to terminate.

In accordance with Lonsdale the judge should perhaps have considered whether the repudiatory breach alleged by EE was sufficiently connected with the fact that Phones 4U had gone into administration for EE’s decision to terminate to be treated as caused by the repudiatory breach which EE was alleging.

What the judge says

The judge expressed his decision in terms of the wording of EE’s termination letter.

EE’s termination letter:

• stated that EE was terminating immediately
• stated the termination was pursuant to clause 14.1.2
• EE did not identify any breach of contract or renunciation as causing or justifying the decision to terminate
• EE expressed that as a consequence of the termination Phones 4U’s authority to sell and promote EE products and services was also terminated with immediate effect

The characteristics of the case were therefore that:

• a right to terminate existed under the agreements, triggered otherwise than by breach
• that right was expressly exercised
• at the time of the termination no mention of any breach was made

Andrew Baker J stated that he found EE’s termination letter entirely clear. It 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. 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.

Conclusion

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.

It will not be sufficient to ‘reserve rights’ in general terms: EE’s termination notice said that EE was reserving ‘all its rights and remedies’.

If one is terminating under a contractual right by reason of excess off-hire, one will need also to say, for example, ‘charterers believe that the situation may be a result of a repudiatory breach of owners’ obligations to maintain the vessel, and if this is so then charterers hereby also terminate on the basis of owners’ repudiatory breach’.