The importance of properly drafted termination notices

A recent case in the UK (Phones 4U Limited -v- EE Limited) serves as a warning to businesses of the unintended, and potentially costly, consequences of issuing inadequate termination notices to contractual counterparties. Background The appointment of an administrator (somewhat similar to an examiner in Ireland) by Phones 4U gave rise to a right for EE to terminate its commercial contract with them and EE sent the following termination notice: “In accordance with ... A recent case in the UK (Phones 4U Limited -v- EE Limited) serves as a warning to businesses of the unintended, and potentially costly, consequences of issuing inadequate termination notices to contractual counterparties. Background The appointment of an administrator (somewhat similar to an examiner in Ireland) by Phones 4U gave rise to a right for EE to terminate its commercial contract with them and EE sent the following termination notice: “In accordance with clause 14.1.2 of the Agreement [a contractual right to terminate for an insolvency event], we hereby terminate the Agreement with immediate effect… Nothing in this notice shall be construed as a waiver of any rights EE may have with respect to the Agreement... Without limiting the generality of the previous sentence, nothing herein shall be deemed to constitute a waiver of any default or termination event, and EE hereby reserves all rights and remedies it may have under the Agreement...” EE and Phones4U accepted that an insolvency event such as the appointment of administrators was not actually a breach of contract, but was an event giving rise to an express right to terminate the contract. However, by way of counterclaim EE subsequently sought £200m damages for “loss of bargain” resulting from alleged common law breaches (repudiatory breach of contract and / or renunciation of the contract) as well as damages for breach of the express terms of the contract. Court Decision The judge found that EE’s termination notice communicated unequivocally that EE was terminating in exercise of, and only of, its right to do so under clause 14.1.2 of the trading agreement, a right independent of any breach. This was not saved by the reservations in the letter. The Court remarked that ‘a right merely reserved is a right not exercised’ and emphasized that EE could not now re-characterise the events after the fact and claim that it terminated for breach of contract when that is simply not what it did. Key Lesson In the present case, by electing to terminate solely under a single contractual provision, EE effectively extinguished any right to terminate for other reasons and therefore could not claim for damages under heads of loss relating to such other termination rights. This proved to be extremely costly to EE. Courts will likely pay close scrutiny to the exact terms of any termination or notice in determining its precise legal effect. Therefore a terminating party should, from the outset, consider very carefully all potential rights and remedies it may have and whether they are cumulative or mutually exclusive before making a decision and communicating it to the counterparty so as to avoid inadvertently losing any rights or remedies it may later wish to rely on. While this is a UK court decision, it may be of persuasive authority in this jurisdiction, with an Irish court likely to apply similar reasoning.