Assessing damages for termination
How will the Court assess damages for termination on an express contractual right?
Phones4U ceased trading and went into administration in September 2014. Following this, EE terminated its trading agreement with Phones4U on the basis of an express contractual provision, entitling EE to terminate on an insolvency event. The termination notice made it clear the termination was on this basis, and was irrespective of breach by Phones4U.
Phones4U subsequently claimed £120million in unpaid commission from EE under the trading agreement. In response, EE counterclaimed for £200million of damages at common law for loss of bargain resulting from repudiatory breach of the trading agreement. In particular, EE argued that the Phones4U's cessation of trading (on 15 September) and EE's termination notice (on 17 September) amounted to repudiatory breach of Phones4U's obligations under the trading agreement to market and sell products.
On an application of summary judgment, the Court confirmed that EE needed to show that the termination notice was an exercise of EE's common law right to terminate for repudiatory breach, not simply an exercise of a contractual right to terminate the trading agreement, in order to recover damages for loss of bargain.
The Court decided that EE's termination letter had communicated expressly and unequivocally that EE was terminating on the basis of its contractual right under the trading agreement, irrespective of any breach by Phones4U. This termination right was independent of any breach, and EE's common law right to terminate for repudiatory breach. It was clear that the circumstances of termination and consequential loss of bargain did not result from a repudiatory breach.
Although the termination notice had 'expressly reserved all rights and remedies', this did not assist EE as 'a right merely reserved is a right not exercised'.
As such, EE's counterclaim had no prospect of succeeding and was summarily dismissed.
Why is this important?
This decision confirms that if a termination notice states that a party is terminating on the basis of a contractual right to terminate only, the terminating party will lose its right to claim common law loss of bargain damages for repudiatory breach. This may have very significant commercial consequences.
Any practical tips?
Make sure all grounds of termination are covered in any termination notice. Where appropriate, a termination notice should be clearly drafted to confirm that termination is based not only on a contractual right to terminate, but also on repudiatory breach of contract – particularly if there is a possibility of a damages claim in the future (by either party).