How to avoid :( when terminating a contract

The first case to involve the use of emojis in a commercial context

The High Court has recently handed down a salutary lesson to parties who may have multiple grounds for terminating a contract.

The case of Phones 4U Limited (in administration) v EE Limited concerned the demise of retailer Phones4U and in particular the decision by a number of the UK’s mobile phone operators (such as Vodafone, EE and O2) to end their trading relationship with Phones4U.

On 12 September 2014, the directors of Phones4U resolved to appoint administrators.  Phones4U shops and its website traded over the weekend of 13 to 14 September 2014, but ceased trading on the morning of 15 September 2014.  Phones4U posted a message on its website explaining why Phones4U was offline, referring to EE and Vodafone and promising an update as soon as possible.  The message ended with ☹. EE would allege in the legal proceedings that this amounted to a false and misleading statement.

On 17 September 2014, EE sent a letter to the Administrators of Phones4U terminating their contract with Phones4U.  The letter stated:

In accordance with clause 14.1.2 of the Agreement [a contractual right to terminate for an insolvency event], we hereby terminate the Agreement with immediate effect….

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….”

EE and Phones4U accepted that an insolvency event such as the appointment of administrators was not a breach of contract but was an event giving rise to an express right to terminate the contract.  However, EE sought £200m damages for “loss of bargain” resulting from alleged common law breaches (repudiatory breach of contract and / or renunciation of the contract) as well as damages for breach of the express terms of the contract.

Phones4U argued that EE could not bring claims for common law breaches because EE had not based its termination on common law breaches.

The Court’s decision

Despite finding that EE had a real prospect of establishing that Phones4U had committed sufficiently serious breaches of contract to amount to repudiatory breaches, the Judge decided that EE had elected to exclusively rely on the contractual right to terminate rather than for any other reason (which may or may not have been available at the time).  Therefore, EE was prevented from bringing claims for repudiatory breaches.  As the Judge noted, EE could not re-characterise the facts surrounding the termination letter and claim it terminated for repudiatory breach when it plainly did not.

The Judge also went on to rule that the “non-waiver” statements contained in the letter were not sufficient to protect a subsequent claim for repudiatory breach noting “a right merely reserved is a right not exercised”.

Lessons learnt

Termination of a contract often has serious consequences and so it is important to consider all your rights and remedies and whether they are compatible, complimentary or might lead to different claims for loss before proceeding.

Where contractual breaches and rights of termination are not compatible or complimentary to common law breaches, an express election of contractual grounds for termination to the exclusion of others may result in a party losing potentially valuable claims.

Given the Judge’s warning that a reservation of rights does not mean an election of such rights, parties who consider they have multiple grounds for termination may be best served setting out the alternative grounds for termination within the termination notice.

This article was written by Michael O'Connor. For more information please contact Michael on +44 (0)20 7427 6441 or michael.o'connor@crsblaw.com