Injunctions, limitation of liability clauses and the meaning of “adequate remedy”
In the case of AB v CD,1 the Court of Appeal had to consider the proper approach to the granting of interim injunctions. More specifically, the courts had to consider the impact of limitation of liability clauses when a party seeks an interim injunction. When deciding on whether to grant an injunction, the well-known principles set out by Lord Diplock in the case of American Cyanamid Co v Ethicon Ltd2 will be applied. These include whether there is a serious question to be tried and whether damages would be an adequate remedy.
The parties had entered into a licensing agreement concerning an eMarketplace – an internet-based electronic platform used internationally to buy and sell goods. Clause 11.4 of this agreement limited the damages either party could recover and excluded certain heads of loss altogether, including loss of profit. On 6 June 2013 CD gave notice that it would terminate the agreement at midnight on 31 December 2013. AB did not accept this and expressly reserved its right to seek an injunction to stop this. On 20 December 2013, AB commenced an arbitration under the LCIA Rules and applied to the court under s.44 of the Arbitration Act 1996 for an interim injunction to restrain CD from terminating the agreement, pending the outcome of the arbitration.
The view at first instance
Mr Justice Stuart-Smith3 held that there was a serious question to be tried and then went on to consider the meaning of “adequate remedy”: does it mean full compensation for what had been lost or something that might be less than this, yet regarded as adequate in the eyes of the law? Lord Diplock had said that:
“the governing principle is that the court should first consider whether… he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant’s continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable would be [an] adequate remedy and the defendant would be in a financial position to pay them, no interim injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage.”
AB submitted that if the termination went ahead, its business would cease to exist as it would lose its only source of income and therefore it would not be able to fund the costs of the arbitration. The fact that the parties had entered into an agreement which limited the recovery of damages should not prevent the court from looking objectively at whether those recoverable damages amount to full compensation. AB further asserted that it would not be able to recover “adequate damages” because its main head of claim would be for loss of profits, which might be excluded by clause 11.4. Therefore AB urged the court to follow the Court of Appeal’s approach in Bath and North East Somerset DC v Mowlem plc4 and grant the injunction. In Bath, the parties had an agreed LADs clause. The Court of Appeal upheld the injunction, recognising that it may be difficult to assess the totality of any likely loss before the event and that such an assessment (the agreed LADs rate):
“may prove in the event not to give rise to adequate compensation, so that to leave a party to a claim in damages may mean that it will suffer loss which the grant of an interlocutory injunction would completely avoid”.
However, Mr Justice Stuart-Smith noted that there was a tension between the decision in American Cyanamid, as applied by the Court of Appeal in Bath, and the approach suggested in Vertex Data Science Ltd v Powergen Retail Ltd (2006).5 In Vertex, there was also a limitation clause that excluded liability for loss of profit and imposed other limitations on recoverable damages. Powergen served notice on Vertex terminating their contract for the outsourcing of customer management services. Vertex applied for an injunction on
the basis that it would suffer unquantifiable loss for which an award of damages would be an inadequate remedy. Whilst injunctive relief was not granted, Mr Justice Tomlinson described the Bath case as being:
“an extraordinary case on the facts where the contractor, Mowlem, sought indefinitely to delay completion of the high profile Millennium Bath Spa project, a project which was intended and expected to confer significant benefits upon the local economy”.
Here, AB submitted that the court should follow the Bath case. The fact that the parties had entered into agreement about the recoverable measure of damages should not prevent the court from looking objectively at whether the damages recoverable by AB would amount to full compensation. AB was submitting that liquidated and ascertained damages clauses and limitation clauses are conceptually the same, being prior to contractual agreements determining the measure of recoverable damages, and the court should have been prepared to look behind that prior agreement to the substance of whether or not damages were an adequate remedy.
Mr Justice Stuart-Smith held that the distinction between the authorities boiled down to what the intention of the parties was when they entered into the contract. In Bath, the agreement and intention was that the Council’s losses should be fully compensated (via the LADs clause), while in Vertex the agreement and intention was that the relevant heads of damage should not be compensable. Here, the inability to claim loss of profits was something that was part of the agreement between the parties. This therefore demonstrated the importance of considering the potential impact of any limitation of legality clause when negotiating a contract, especially when it comes to any limitations on damages which are linked to wrongful termination. As Mr Justice Stuart-Smith put it, clause 11.4 was a “part of the price that the Claimant agreed to pay when executing the Licensing Agreement”.
He therefore refused to grant the interim injunction, finding that AB was not able to demonstrate that damages were an inadequate remedy. The commercial expectations of the parties were set by the package of rights and obligations that constituted the agreement (namely clause 11.4). Damages were therefore an adequate remedy.
However, the Judge admitted to “a degree of unease at the result” which stemmed from the authorities he considered in his judgment. He had a “nagging doubt” that the approach that he had adopted “may be too inflexible in a case such as the present”. He therefore awarded permission to appeal given the potential wider implications.
The appeal
On appeal, Underhill LJ noted that where the parties to a commercial contract have agreed that in the event of a breach, damages for certain heads of loss will be irrecoverable, it is right in considering whether an injunction should be granted, to ignore the fact that the innocent party may suffer loss falling under those heads. He then broke down clause 11.4 into two, noting first that liability was excluded for certain types of loss, including “lost profits”, and second that there was a cap on such damages as might nevertheless be recoverable. There was thus a serious risk that AB’s claim for damages would be excluded or limited. Underhill LJ then went on to consider the Bath case, noting that Mance LJ said:
“The Council accepts – indeed it asserts – that it would be bound in any claim for damages by its contractual agreement regarding liquidated and ascertained damages. The Council is not seeking to avoid that agreement, but to rely on it. It is the reason why the Council seeks an injunction, and why the Council submits that interlocutory injunctive relief is appropriate. Mowlem is not entitled to breach its contract. The agreement on liquidated and ascertained damages is not an agreed price to permit Mowlem to do so, and it does not preclude the court granting any other relief that may be appropriate. In my view, the Council’s case is right in principle.”
Therefore Mance LJ concluded that it was open to the Council, despite the liquidated and ascertained damages clause, to rely on the probable higher level of the actual loss that it would suffer without an injunction, in order to show that it would not be adequately compensated if it were left to a claim in damages.
On behalf of AB, it was submitted that the Bath case constituted binding authority that an applicant for an injunction was entitled to argue that damages would not be an adequate remedy for a threatened breach of contract because the recoverable damages were limited by a clause excluding or limiting liability for the kind of loss which was likely to be caused by the breach.
AB also submitted that this was the correct position in principle. The primary obligation of a party to a contract was to perform his contractual obligations. The obligation to pay damages in the event of breach is a secondary obligation, and an agreement to restrict the damages recoverable in that event (whether by excluding certain types of loss or imposing a cap) did not constitute an agreement that a party could walk away from his primary obligations even in circumstances where an injunction would otherwise be workable.
On behalf of CD, the focus was on the rule that the court would not normally grant an injunction where damages would be an adequate remedy. The damages with which the rule was concerned were the damages “recognised by the contract”. For a court to hold that damages were not an adequate remedy for a breach because the parties had agreed – in a clause that affected both parties equally – to restrict the damages recoverable would fail to give effect to their commercial expectations.
Underhill LJ noted that the Bath case was an unusual one where the court had been concerned by the broader damage to the public interest if the project had been delayed. He agreed that the Bath case did constitute binding authority on the point and was right in principle. Mance LJ’s comments above, draw a distinction between a claim to recover damages and a claim for an injunction designed to avoid any cause for a claim to such damages. Agreement as to the quantification of loss is conclusive to the first point but not the second. Thus the purpose of clause 11.4 here was to deal with the damages a party can recover if the other is liable for breach of contract.
The primary obligation of a party is to perform the contract. The requirement to pay damages in the event of a breach is a secondary obligation, and an agreement to restrict the recoverability of damages in the event of breach cannot be treated as an agreement to excuse performance of that primary obligation. Therefore Underhill LJ concluded that there was no question of the commercial expectations of the parties being undermined. The primary commercial expectation must be that the parties will perform their obligations. The expectations created (indeed given contractual force) by an exclusion or limitation clause are expectations about what damages will be recoverable in the event o f breach, something rather different.
Accordingly, the Court of Appeal allowed the appeal.
Conclusion
The other two Appellate Judges sitting with Underhill LJ provided their own short statements of principle to reinforce the detailed judgment made by their colleague. Ryder LJ noted that he favoured:
“re-casting the question to be asked on an application for injunctive relief, which is: ‘Is it just in all the circumstances that a [claimant] be confined to his remedy in damages?’ per Sachs LJ in Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 @ 379H.”
Whilst Laws LJ succinctly dealt with the issue in this way:
“Where a party to a contract stipulates that if he breaches his obligations his liability will be limited or the damages he must pay will be capped, that is a circumstance which in justice tends to favour the grant of an injunction to prohibit the breach in the first place.”