BULLETIN February 2018
Phones 4U and recent developments in the law of termination: drafters beware Phones 4U Limited (in administration) v EE Limited [2018] EWHC 49 (Comm)
David Lewis QC and Richard Greenberg report on the recent judgment of Mr Justice Andrew Baker in which Phones 4U obtained summary judgment dismissing a counterclaim brought by EE. The case will be of particular interest to those practitioners who are involved with drafting contractual termination notices, or advising on the effects of such notices. It may also be the first Commercial Court judgment to consider, albeit not use, emojis. The key point to note is Baker J’s decision that EE could not recover “loss of bargain” damages for repudiatory breach at common law, even if there had been such a repudiatory breach by Phones 4U, because EE’s termination letter relied solely on a contractual right to terminate, rather than a right to terminate for repudiatory breach at common law.
The facts fashion, the termination letter Phones 4U’s website referring to provided that, “nothing herein shall EE and Vodafone in explaining why By 2014, Phones 4U’s business model be deemed to constitute a waiver of Phones 4U was offline. The statement was in trouble. Its core business was any default or termination event, concluded with a sad face emoji. This the selling of mobile phone contracts. and EE hereby reserves all rights other counterclaim, and the effect of Yet, by then, many of the major and remedies it may have under the that statement, fell outside the scope mobile network operators, including Agreement…” of Baker J’s decision. Accordingly, Three, O2 and Vodafone, had decided the Judge left open the question of to bring their arrangements with The dispute whether the case, “will offer the court Phones 4U to an end. Baker J’s judgment deals with at trial an opportunity to consider the EE decided to follow suit. On 12 Phones 4U’s application for summary use of the sad face emoji as creating or September 2014, EE informed Phones judgment under CPR Part 24 dismissing involving a breach of contract” (§12). 4U that it would not renew or replace EE’s counterclaim. That counterclaim The decision its trading agreement with Phones 4U was for loss of bargain damages (the “Agreement”). That afternoon, resulting from the termination of the In summary, the Judge decided the four the board of Phones 4U met and contract. EE claimed loss of over £200 issues referred to above as follows: resolved to seek the appointment million. Phones 4U’s underlying claim First, on the question of whether of administrators. On 15 September was not relevant for these purposes. there was a breach by Phones 4U (and 2014, the retail outlets of Phones The issues that fell to be determined on the assumption that the relevant 4U did not open for business. Online under Phones 4U’s application obligations existed), it was held that trading ceased. for summary judgment were as EE had a reasonable prospect of On 17 September 2014, EE sent a follows. First, was there a breach establishing breach as alleged (§35). termination letter to Phones 4U. The by Phones 4U? Secondly, if so, was it Secondly, on the question of whether letter terminated the Agreement, a repudiatory breach? Thirdly, was that breach was repudiatory, it was “in accordance with clause 14.1.2 of there a renunciation by Phones 4U? held that EE had a reasonable prospect the Agreement”. Clause 14.1.2 was And, fourthly, did the terms of EE’s of establishing repudiatory breach on a standard insolvency termination termination letter defeat any claim by the part of Phones 4U at the time of clause, which entitled EE to EE for damages for loss of bargain? EE’s termination letter (§54). The issue terminate based solely on the fact EE had brought another counterclaim, came down to whether, as at the date of appointment of administrators which related to a statement on of termination, it was objectively likely by Phones 4U (§78-79). In familiar
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that the cessation of trading would in exercise of, and only of, its to say that it terminated for the continue long enough to deprive EE right to do so under clause 14.1.2. repudiation it wished to prove at trial, of substantially the whole remaining That contractual right existed which rendered its loss of bargain benefit of the Agreement. independently of any breach (§132). In damages claim unsound. these circumstances, EE’s termination Thirdly, in the light of the decision Another important aspect of the letter had not done what it needed on repudiatory breach, any final view decision is that the termination letter to do in order to ground EE’s loss the Judge might have come to on the – and EE’s counterclaim – was not of bargain claim. The letter did not renunciation question was insufficient saved by the fact that it made clear clearly communicate that EE was to lead to summary judgment, and he that it was not to be taken as waiving exercising its common law right to said no more on the issue (§58). any breach that might exist, any rights terminate for repudiatory breach. in respect of which were reserved. Fourthly, on the question of whether One question that arises is how As Baker J put it, “a right merely the terms of EE’s termination letter this result sits with the well-known reserved is a right not exercised” defeated any claim by EE for damages principle, established by Boston Deep (§132). The Judge went on to say that for loss of bargain, it was held that Sea Fishing & Ice Co v Ansell [1888] 39 EE may pursue all remedies that may they did defeat such a claim (§§130- Ch D 339, that a party who terminates be available to it bearing in mind 133). We discuss this fourth issue in a contract for a bad reason may that the contract was terminated more detail below. subsequently defend itself against under clause 14.1.2, but not for Loss of bargain damages a claim for wrongful termination by breach. However, EE was not entitled reference to a good reason extant at to “re-characterise the events after The significance of Baker J’s decision the time of termination, whether or the fact and claim it terminated for is that a claim for damages for not then known to that party. In this breach when that is simply not what loss of bargain will be bad in law, regard it is striking that EE’s claim it did” (§132), with the result that the even if there has in fact been a for damages for loss of bargain was counterclaim was dismissed. repudiatory breach or renunciation, in dismissed in circumstances where the circumstances where: (i) a contractual Conclusion Agreement had been terminated and right to terminate also exists, it was assumed that Phones 4U was The judgment of Baker J in Phones triggered otherwise than by breach in repudiatory breach at the time of 4U Limited (in administration) v EE (actual or anticipatory); (ii) that right termination. A key distinction appears Limited is a noteworthy development is expressly exercised; and (iii) at the to lie between defence and attack, ie. in the law of termination and there time of termination, no mention is claim. appears to be no precise precedent made of any breach (§§83, 86). Given (§118). Baker J’s thorough review of the Judge’s other findings, this “pure The Judge distinguished the Boston the authorities, which is beyond the point of principle” is the ratio of his Deep Sea Fishing principle on the basis scope of this newsletter, shows the decision. The danger to the drafters that the present case did not concern various inter-connecting principles at of contractual termination notices is a purported termination alleging play in the context of repudiation and clear and present. ‘repudiation A’ that cannot be made contractual termination. out but where different ‘repudiation The analysis flows from the terms B’ existed at the time. The Boston The specific effect of his decision of EE’s termination letter. As the Deep Sea Fishing principle means is that if a termination letter Judge put it, “the relevant issue that, in such a case, the innocent communicates clearly a decision of construction is whether by its party can successfully defend to terminate only under an express termination letter EE purported itself, ie. show it has no liability contractual right to terminate that to exercise a common law right for wrongful termination, because has arisen irrespective of breach, to terminate for the repudiatory it could instead have terminated then it then it cannot be said that the breach and/or renunciation now lawfully for ‘repudiation B’. But that contract was terminated for a breach alleged. EE requires an affirmative principle does not allow the innocent and, in those circumstances, a claim answer” (§131). EE did not receive party to claim damages premised on for damages for loss of bargain at an affirmative answer. Its letter termination for ‘repudiation B’ when, common law cannot run. In practical communicated unequivocally that on the facts, it did not so terminate terms, the decision highlights the need EE was terminating the contract (§129). In this case, EE was not able for abundant care in the drafting
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of termination notices, particularly with an eye on the type of claim that an innocent party may wish to bring following termination. Terminate in haste, repent at leisure…
If you require advice on any of the topics discussed in this briefing from David, Richard or any member of 20 Essex Street please contact: David Lewis QC Richard Greenberg [email protected] David practises across a spectrum Richard has a broad commercial of general commercial and private practice, with a particular focus on international law disputes, both civil fraud, international trade and in Court and arbitration, in areas finance, insolvency and company law including civil fraud, energy, and private international law. commodities, shipping, banking, He is regularly instructed to advise or insurance and the conflict of laws. act in complex, high-value litigation He is also registered as a practitioner and arbitrations across these practice with rights of audience before the areas, both as sole counsel and as a DIFC Courts and to appear before the junior. Singapore International Commercial Many of the disputes on which Court. He regularly appears in Richard has worked have involved high value cases involving complex issues concerning the termination of issues relating to repudiation and contracts. contractual termination.
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