A recent decision of the High Court highlighted the importance of parties thinking carefully about whether they are entitled to bring a contract to an end and properly informing the other contracting party of the grounds for termination.
Commercial contracts often expressly provide for a party to terminate the contract in certain circumstances; for example, if the other party breaches a key provision and is either unable to remedy the breach or fails to do so within a reasonable period of time. These express provisions will be in addition to a party’s common law right to treat the contract as terminated by a so-called “repudiatory” breach by the other party. That is, a breach which is so serious that it substantially deprives the innocent party of the benefit of the contract and which is only consistent with the guilty party electing no longer to be bound by the terms of the contract.
Usually a party seeking to exercise an express right to terminate the contract will be required to inform the other party and to state the grounds on which it considers itself entitled to do so. Equally, a party purporting to exercise a right to treat the contract as terminated by the other’s repudiatory breach must tell the other party that it is doing so, failing which it will be deemed to have affirmed the contract (i.e. elected to allow it to continue, despite the breach).
In Phones 4u Ltd (In Administration) v EE Ltd, the Court ruled that EE was prevented from bringing a common law damages claim against the administrators of Phones 4u where EE had served a letter terminating the contract on the grounds of an express contractual right.
Phones 4u and EE were parties to a contract under which Phones 4u had sold phones and services on behalf of EE. Phones 4u got into financial difficulty, appointed administrators and eventually ceased trading. The contract expressly provided for a party to be entitled to terminate the contract if the other party appointed administrators. EE wrote to Phones 4u terminating the agreement, saying that it was exercising its right to terminate the contract and referring to the relevant clause. There was no dispute that it was entitled to do so.
When the administrators for Phones 4u brought a claim against EE for unpaid commission fees that were already due under the contract when it was terminated, EE counterclaimed, arguing that it was entitled to damages for the financial loss it expected to suffer as a result of the contract ending prematurely. EE claimed that when Phones 4u ceased trading it breached its contractual obligations to market and sell EE’s products, that the cessation of trade appeared to be indefinite, and that Phones 4u was therefore in repudiatory breach.
The administrators of Phones 4u asked the Court to dismiss EE’s counterclaim on the basis that, as per the notice of termination, it had terminated the contract under the contractual provisions and not in response to Phones 4u’s alleged repudiatory breach. The Court agreed, noting that the termination letter made no mention of repudiatory breach and rejecting EE’s position that a party is able to rely on a repudiatory breach of contract as justification for terminating a contract even where it was unaware of it when the contract was terminated. The Court said that EE could not “re-characterise the events”, that the two grounds for termination were independent of each other, and that EE could not later rely on a ground for termination it did not communicate to Phones 4u at the time. The Court dismissed EE’s counterclaim, preventing it from pursuing a claim for damages it valued at over £200 million.
The case highlights the need to exercise some caution when using an express provision in a contract entitling a party to terminate. In doing so, the terminating party will be restricted to claiming damages for the breach which gave rise to the right to terminate or, as in Phones4u, where the right to terminate did not arise from a breach, prevented from claiming damages at all. It follows that where the breach giving rise to the express right to terminate is also a repudiatory breach, the innocent party should take care to explain in the notice of termination that it is terminating based on the repudiatory breach as well as pursuant to the express contractual right.
As the Phones4u case shows, the consequences of getting a notice of termination wrong can be extremely serious. A party finding itself in a situation where it thinks the other party is in breach of contract should therefore always take legal advice to ensure they are entitled to terminate and the best action to take to ensure they recover any losses.
For any further information, contact Andrew Quick or Lorna Sleave or your usual S&B contact.
Phones 4u Ltd (In Administration) v EE Ltd [2018] EWHC 49 (Comm)
Andrew Quick
Lorna Sleave