In EE Ltd v. Virgin Mobile Telecoms Ltd[1], the Court of Appeal upheld the High Court’s decision that EE’s claim against Virgin was excluded under the terms of the parties’ telecommunications supply agreement.[2] While the decision ultimately confirmed the reasoning of the lower court, the decision is notable for being surprisingly close.
Background
Under the terms of the agreement, Virgin was obliged to use EE’s radio access network exclusively for the provision of services to its customers and would pay EE specified charges depending on the level of the customers’ usage of the network. EE claimed Virgin had breached the exclusivity obligation and had thereby unlawfully avoided paying EE the charges it would otherwise have owed. EE claimed the revenue it would have received but for Virgin’s breach.
Virgin made an application for strike out or reverse summary judgment on the basis that EE’s claim fell within an exclusion clause in the agreement, which excluded claims for damages for loss of ‘anticipated profits’.
The High Court held that EE’s claim was a claim for loss of anticipated profits and was, accordingly, excluded under the agreement. EE appealed.
EE’s appeal
EE had three main limbs to its appeal:
First, as EE had provided the services to Virgin and incurred all the cost of doing so, the lost revenue represented a diminution of value of the contract in that EE was being paid less for the same services. EE sought to rely on two cases in which it was held that a diminution in value of a contract is not loss of profits.
Secondly, the phrase ‘anticipated profits’ is properly to be understood as profits that might be incurred outside the contract. The profits EE was to earn within the contract (i.e., the charges less the cost of providing the services) were therefore not ‘anticipated profits’. Again, EE sought to rely on case law to demonstrate this point of principle.
Thirdly, the exclusivity provision was fundamental to Virgin’s performance of the contract. If EE could not recover the revenue it lost as a result of the breach of that fundamental provision, it reduced that to a mere statement of intent, which the English courts seek to avoid where possible.
The Court of Appeal’s judgment
The judges had notably different views of the issues.
Lord Justice Zacaroli, giving the leading judgment, had no hesitation in dismissing the appeal. First, the case law on diminution in value relied upon by EE did not establish any general principle that diminution in value of a contract is not loss of profits. These cases involved very differently drafted clauses, in very different contracts, and were determined in their own context. They could not, therefore, be relied upon by EE in this case. Secondly, there is nothing in the phrase ‘anticipated profits’ that suggests a distinction is to be made between profits made within a contract and profits that may be made outside of it. The case law on which EE relied was of little assistance as the authorities simply showed that the words ‘loss of profits’ may be differently construed depending on their contractual context. Thirdly, EE was not left without recourse – it could have brought an injunction and/or a claim for wasted expenditure.
In contrast, Lord Justice Phillips, allowed the appeal. He thought it would be surprising and contrary to business common sense if the parties intended that Virgin could breach the key exclusivity provision without incurring liability to pay EE damages reflecting the loss of revenue. To exclude this right would undermine the bargain, and it was ‘unclear’ why the parties would have so provided consistently with business common sense. He did not think that the theoretical availability of a claim for wasted expenditure was a substitute for a straightforward claim for lost revenue. Lastly, he agreed that the term ‘anticipated profits’ indicates hoped for but uncertain profits which would arise as a consequence of – but outside the performance of – the contract, not a sum directly payable under the contract.
Finally, Lord Justice Coulson admitted that he had not found the central issue easy to decide. He stated his original instinct was that the claim for revenue would not have been caught by the exclusion clause because it would ‘strike at the heart of the bargain’. However, expressing ‘more reluctance than Zacaroli LJ’, he concluded that there was no reason why ‘anticipated profits’ should be understood to mean profits anticipated to be earned outside the contract.
Takeaway
While the English courts are often at pains to emphasise the importance of predictability in their decision-making, the fact that this decision was close to going the other way demonstrates that there is often a reasonable degree of uncertainty of outcome when interpretation of a contract is given over to the judiciary. As ever, parties can avoid this with clear and – importantly – thorough drafting. Contract drafters should now consider the need to address the related issues of diminution of value and internal profit directly in any exclusion clauses.
[1] [2025] EWCA Civ 70,
[2] We previously wrote about the High Court’s decision in this 15 August 2023 On the Record blog post.
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