Don't Lose Damages Rights by Terminating Contracts Incorrectly
When something goes wrong in a commercial contract, it is important to take advice on the correct way to terminate the contract.
Otherwise, doing things in a particular way may mean that the innocent party loses their right to claim further damages for loss of bargain. The recent High Court case of Phones4U Limited (in administration) v EE Limited also shows that it would be wise to provide in the contract for an express right for loss of bargain damages to outlive any termination.
Background Law on Termination
An innocent party has the right at common law to terminate a commercial contract for a repudiatory breach, ie where the other party fails to perform its contractual obligations and therefore substantially deprives the innocent party of what it had bargained for. In addition, the contract usually provides for an express contractual right to terminate in other situations, including for material breach or insolvency. A party can generally exercise both rights when terminating, but if they fail to do so it can have a dramatic effect, as happened in this case.
Facts
Phones4U had agreed to sell EE's services. The contract gave EE an express right to terminate where Phones4U was unable to pay its debts. After Phones4U had become insolvent, EE wrote to Phones4U, terminating the contract under the termination clause. EE later claimed for its loss of benefit of £200m, that EE had expected to profit from if the contract had continued.
The High Court dismissed EE's claim. The Court ruled that in order for EE to have been able to claim for loss of bargain damages, it would have had to show that it had terminated at common law for repudiatory breach - which EE could have chosen to do at the point of termination. Instead, EE's letter was clearly stated as terminating under the express contractual right on insolvency. It was therefore unable to sue for its £200m loss of bargain.
EE's termination letter had expressly reserved EE's rights and remedies under the contract, but this was not enough to save EE.
Comment
This case shows the importance of drafting contract termination letters carefully. Failure to do so could lead to an inability to claim for all losses. In this case, the mistake cost EE £200m.
Parties should also consider including an express right in a contract to preserve their rights to claim for loss of bargain in the event of early termination of the contract for whatever reason.