Terminating contracts: proceed with care


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For further information, please contact:

Bree Taylor, Partner, Fladgate LLP (btaylor@fladgate.com)

Steven Mash, Partner, Fladgate LLP (smash@fladgate.com)


 

Following the recent upturn in the number of companies entering insolvency processes, it is important to consider what steps you should take if you have a contract with a company in financial trouble. Your first instinct might be to end the contract immediately; however, the recent decision in Phones 4U Ltd (in administration) v EE Ltd serves as an important reminder of the need to think carefully about how best to protect your interests before doing so.

Background

In September 2014, Phones 4U appointed administrators and ceased to trade. At the time of its collapse Phones 4U had an ongoing agreement with network operator EE to sell its mobile phones and services. As is common in commercial agreements, the contract allowed EE to terminate on the ground of Phones 4U’s insolvency and EE promptly sent a letter terminating the agreement with immediate effect.

The claim

Phones 4U subsequently made a claim for unpaid commission fees. EE issued a counterclaim arguing that it was entitled to damages for the financial loss it expected to suffer as a result of the contract ending prematurely. EE said that this amounted to a repudiatory breach of contract, because Phones 4U had ceased trading and so was no longer fulfilling the terms of the agreement. A repudiatory breach is one which is so serious that it deprives the innocent party of the benefit of the contract and gives it the right to choose either to end the contract or to affirm it.

In order to make its claim for loss of bargain damages, EE was required to show that the termination of the contract, which created the loss of bargain, resulted from a repudiatory breach by Phones 4U.

However, when EE expressly exercised its contractual right to terminate, the only ground it relied on in the letter of termination was the insolvency of Phones 4U. EE failed to mention any other breach by Phones 4U, even though other breaches may have existed at the time.

The court dismissed EE’s counterclaim, noting that the termination letter made no mention of repudiatory breach and said that EE could not re-characterise events after the fact and claim that it terminated for breach when that is not what it did.

Conclusion

In this case EE was prevented from bringing a counterclaim of some £200 million because it failed to set out the correct grounds in the notice of termination.

This highlights the need to take care when using an express provision in a contract entitling a party to terminate. Not only should the terms of the contract be reviewed, but also consideration should be given to common law principles to determine whether any other circumstances exist which give may rise to separate breaches of the contract.

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