Out-Law Legal Update | 21 Feb 2018 | 1:59 pm | 1 min. read
Mobile phone retailer Phones 4U and mobile network EE had a trading agreement relating to mobile phone contract acquisition, retention and in-life management.
Phones 4U entered into administration and ceased trading in September 2014. Two days after the appointment of administrators, EE sent a letter to Phones 4U terminating the trading agreement with immediate effect on the basis of Phones 4U’s insolvency. The trading agreement expressly permitted EE to terminate on insolvency grounds.
Phones 4U's administrators sued EE over unpaid commission fees and revenue shares which it estimated would total approximately £120 million. EE counter-claimed that there had been a "loss of bargain", meaning that when the trading agreement was terminated, it lost the opportunity to receive performance of the remainder of the agreement.
EE argued that when Phones 4U ceased trading, it had breached its contractual obligations to promote and sell EE’s products and services. EE said that this was a repudiatory breach of the contract because the "seriousness of [the] breach entitles the innocent party to treat the contract as discharged". This allowed it to make a claim for damages for loss of bargain.
Phones 4U said that because EE's termination of the contract was based on Phones 4U's insolvency and not on the fact that it had ceased to trade, EE had no legal basis for a 'loss of bargain' claim. The court agreed, making this the first ruling on this point.
The judge ruled that "a loss of bargain damages claim required EE to show that the termination of the contract, which created the loss of bargain, resulted from the repudiatory breach...". The court found that EE had no real prospect of success in its contention that its termination letter had the effect of terminating the agreement for repudiatory breach, even though EE had included reservation of rights wording in its termination letter. The termination letter "communicated unequivocally" that EE was terminating under its contractual right to do so, independent of any breach; the fact that it could have been terminated for repudiatory breach could not be used to "re-characterise the facts".
This significant decision should make companies think carefully about how they terminate a contract following another company's insolvency, particularly if they are likely to be the subject of claims from the insolvent party and need to preserve potential counterclaims.
James Hillman is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com