Terminating contracts for insolvency – think before pressing "Send"

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If one of your commercial partners gets into financial difficulties you might want to end the relationship immediately. And you may well have the right to do just that under your contractual terms. But is that always the right thing to do?

If one of your commercial partners gets into financial difficulties you might want to end the relationship immediately. And you may well have the right to do just that under your contractual terms. But is that always the right thing to do? A recent case (Phones 4U Ltd (in administration) v EE Ltd [2018] EWHC 49) shows the dangers of jumping in with both feet and terminating an agreement without thinking through the consequences.

Mobile phone retailer Phones 4U had grown from small beginnings to about 560 standalone stores and 159 concession when it went into administration in 2014. Working on behalf of several of the main mobile network operators, it sold pay-monthly and pay-as-you-go packages to users mainly on a commission or revenue-sharing basis. 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 either side to terminate on the grounds of the other’s insolvency. When Phones 4U appointed administrators in September 2014, and ceased trading, it had a year left to run on the EE agreement. But EE promptly sent a letter terminating the agreement with immediate effect based on Phones 4U’s insolvency.

Claim and counterclaim

Phones 4U’s administrators sued EE for unpaid commission fees. EE responded with two counterclaims, the main one asking for damages at common law for EE’s loss of bargain.

EE argued that, when Phones 4U ceased trading, it had breached its contractual obligations to market and sell EE’s products. EE said that this amounted to a fundamental breach of contract because it appeared that Phones4U had permanently ceased trading and so was no longer fulfilling the terms of the agreement.

Phones 4U said that EE could not claim on this basis. Why? Because the letter terminating the contract had been based on the insolvency clause and not in response to the alleged breach of contract.

What’s the real reason?

The judge agreed with Phones 4U. To maintain its loss of bargain claim, EE would have to show that the termination letter was based on the right to terminate for a fundamental breach. But instead, the letter had unambiguously terminated based solely on EE’s right to do so for insolvency, independent of any breach. The letter had included wording about reservation of EE’s rights and remedies, but that was not enough to undo the termination.

In the judge’s words, EE could not “re-characterise the events after the fact and claim that it terminated for breach when that is simply not what it did”.

Lessons learned

The insolvency of a commercial partner may well cause a certain amount of panic. But in circumstances like these, rushing to action could weaken your position. If EE had paused for thought before sending the termination letter, they might have been able to bring a damages claim successfully. Any kind of contractual notice must be drafted carefully to ensure that you protect your rights. And before hastily terminating a contract, it is worth pausing to think through any potential claims you might have.


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