Termination of Commercial Contracts – Take Notice!

The recent Judgment in the case of Phones 4 U Limited (in administration) v EE Limited (2018) has highlighted the potential pitfalls for a party to a contract who wishes to terminate, in particular the wording to be used in any notice of termination.

The two main ways that a party may terminate a contract are as follows:

• Through an express contractual provision (i.e. a clause within the contract that specifies circumstances which give a party a right to terminate), or
• Through the innocent party's common law rights, namely when the breaching party's conduct amounts to a "repudiatory breach" of contract (i.e. a fundamental breach of the contract which is serious enough to entitle the innocent party to terminate)

In the "Phones 4 U" case, there was a trading agreement between the parties. The written contract set out two express clauses which gave either party the right to terminate. Those Clauses were:

• 14.1.1 - if there is a material breach of contract.
• 14.1.2 - in the event that insolvency proceedings have been commenced against one of the parties.

During the term of the agreement Phones 4 U went into administration. EE subsequently notified Phones 4 U that it was terminating the trading agreement a year before it was due to expire. The notice of termination cited clause 14.1.2 as the reason for termination and did not rely on or refer to any breach of contract.. The notice also included the following wording:

"….nothing herein shall be deemed to constitute a waiver of any default or termination event, and EE hereby reserves all rights it may have under the Agreement".

Phones 4 U subsequently issued proceedings against EE for its failure to pay commission fees. This was met by a Counterclaim by EE for "loss of bargain" damages (in excess of £200 million) which arose out of EE's allegation that there was a repudiatory breach of contract by Phones 4 U during the trading relationship.

It was held by the High Court that where a party has terminated in sole reliance on a contractual clause (i.e. clause 14.1.2 in this case) and not any breach of contract then that party is prevented from claiming "loss of bargain" damages on the basis that repudiatory breach was the reason for termination. This was held to be the case even though there was found to be a repudiatory breach of contract on the part of Phones 4 U in this case.

The Court further commented that if EE wished to sue for "loss of bargain" damages then the termination notice should have referred to the repudiatory breach as being one of the reasons for termination. EE's Termination Notice letter did not do this. Although the letter attempted to reserve EE's rights generally (by way of the quotation mentioned above), Mr Justice Baker in giving his Judgment stated that "a right merely reserved is a right not exercised".

This case serves as a stark warning for any party to a contract who is seeking to terminate. Extra care should be taken to consider all possible eventualities when giving notice of termination as a failure to do so correctly can potentially have disastrous consequences.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.