Phones 4U Ltd (in administration) v EE Ltd

[2018] EWHC 49 (Comm)

On 15 September 2014, Phones 4U appointed administrators and ceased to trade. On 17 September 2014, EE terminated the Trading Agreement (“TA”). Phones 4U subsequently made a claim for unpaid commission fees. By counterclaim, EE sought damages at common law alleging that in breach of its contractual obligations Phones 4U had failed to engage in its normal trading activities as authorised seller of EE products and services. EE said that this was a repudiatory breach of contract. Clause 14.1 of the TA gave either party the right at any time to terminate by giving notice in writing to the other with immediate effect:

“14.1.1 if the other party commits a material breach of this Agreement and either such breach is incapable of remedy or, if capable of remedy, has not been remedied to the reasonable satisfaction of the other party within 30 days of a written request from the other party to remedy such breach; or

14.1.2 if the other party is unable to pay its debts … or takes any steps (or any third party takes any steps in respect of the other party) to: initiate a composition, scheme, or other arrangement with any of its creditors…”

It was common ground that the appointment of administrators over Phones 4U gave EE the right to terminate under clause 14.1.2, by giving notice in writing. It was also common ground that the appointment of administrators was not a breach of contract on the part of Phones 4U, and neither involved, nor inevitably resulted in, such a breach. Mr Justice Baker explained that in the termination notice:

(i) EE stated expressly that it was terminating with immediate effect;

(ii) EE also stated expressly that it was terminating pursuant to clause 14.1.2;

(iii) EE did not identify any breach of contract by Phones 4U as causing, justifying or having relevance to its decision to terminate, whether by asserting breach in terms or by referring to or asserting facts that were now said to have amounted to breach;

(iv) EE said that as a result of termination Phones 4U’s authority to sell and promote EE products and services was also terminated.

There was a difference between terminating the contract  as a result of the appointment of the administrators and then going on to allege at a later stage that Phones 4U were in breach of their obligation to market EE products.  Whilst EE had expressly exercised their contractual right to terminate, at the time of termination no mention was made of any other breach (actual or anticipatory) even though in fact such a repudiatory breach and/or renunciation in fact existed. Phones 4U said that because the termination was solely made by reference to clause 14.1.2 of the TA, the counterclaim could not be brought. As this was an application for summary judgment, the court assumed that Phones 4U had breached the obligations alleged when it ceased trading.

The question for the court was whether it was necessary, for the common law claim for loss of bargain damages, that EE had terminated for breach (actual or anticipatory) by Phones 4U. Did EE have to show that the termination letter was an exercise of its common law right to terminate for repudiatory breach, and not simply a termination under clause 14.1.1 of the TA? Phones 4U said that this was what EE had to do and that EE had to communicate to Phones 4U that this was what it was doing. Further, Phones 4U said that the termination letter did not do this. The termination was independent of the breach now being alleged.

Mr Justice Baker agreed that in order to make their claim for loss of bargain damages, EE must show that the termination of the contract, which created the loss of bargain, resulted from a repudiatory breach by Phones 4U. Where a party terminated a contract in sole reliance on a contractual right to terminate without breach by the other party, it could not subsequently claim common law “loss of bargain” damages on the basis that it had terminated in response to the other party’s repudiatory breach, even if there had been such a breach.

To bring such a claim, the terminating party had to clearly communicate that it was exercising its common law right to terminate for repudiatory breach. EE therefore had to show that the contract was terminated by its exercise of its common law right to terminate for that breach. The problem for EE was that the termination letter communicated only the contractual termination.  It did not matter that EE could have terminated for other reasons; they did not.  The Judge concluded that the termination letter:

“communicated unequivocally that EE was terminating in exercise of, and only of, its right to do so under clause 14.1.2, a right independent of any breach. Phones 4U was not accused of breach. EE made clear it was not to be taken as waiving any breach that might exist, any rights in respect of which were reserved. But a right merely reserved is a right not exercised. EE can still sue upon any breach of contract committed by Phones 4U prior to termination. For any such breach, it may pursue all remedies that may be available to it bearing in mind that the contract was terminated under clause 14.1.2 and not for breach. But what EE cannot do is re-characterise the events after the fact and claim that it terminated for breach when that is simply not what it did. Nor can it say that it treated Phones 4U’s renunciation (as now alleged) as bringing the contract to an end when that, again, is just not what actually happened.”

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