AB v CD (2014)
Just because parties have excluded or limited damages for breach of contract does not mean they have agreed to excuse performance of those obligations. Accordingly, such exclusion or limitation clauses do not preclude the courts from granting injunctive relief. The Court of Appeal also clarified that the traditional “are damages an adequate remedy” test for the granting of injunctions should be applied in a way which reflects the “substantial justice” of the situation.
AB entered a licensing agreement (the Agreement) with CD, the owner of an internet based platform (eMarketplace) for the sale of goods and services in the international mining and metals market, in order for AB to market the eMarketplace in the Middle East. The Agreement excluded liability for loss of profits (as well as a number of other heads of damage) and capped the recoverable damages payable to either party in the event of breach of contract as well as tort or negligence or “otherwise arising out of or in connection with the performance or observance of its obligations, or otherwise, in respect of this Agreement”.
CD purported to terminate the contract and in light of that, AB applied for an injunction requiring it to continue to perform its obligations under the agreement and restraining it from terminating the agreement pending the resolution of arbitration proceedings. The High Court rejected AB’s application for an injunction, deciding that there was a serious issue to be tried. Critically, AB had not shown that damages were an inadequate remedy because the effect of the limitation on damages could be excluded since that was “part of the price that [AB] had agreed to pay when executing the licensing agreement”.
The Court of Appeal overturned this decision, allowing the injunction. The Court clarified that the fact that the parties had agreed upon liquidated and ascertained damages did not preclude it from granting an injunction. The parties’ agreement over what damages were payable in the event of breach was relevant to working out damages payable for breach, but not to whether or not an injunction (designed to avoid breach which would lead to a claim for damages) should be granted. The primary obligation of a party is to perform its obligations under the contract. The requirement to pay damages for breach is a secondary obligation. Even if parties agree to restrict the recoverability of damages for breach to a certain amount, this does not mean that they have agreed to excuse performance of the primary obligation.
The key question on an application for injunctive relief should be whether it is just in all the circumstances that a claimant be confined to his remedy in damages. Where parties have capped or excluded damages, that “opens the door” to the possibility of the court exercising its discretion to grant an injunction. The decision whether or not to actually grant an injunction depends on the circumstances, including the scale of the shortfall between agreed damages and actual likely damages as well as the degree of risk of the breach occurring.