EWCA Civ 229
We reported on this case in Issue 163. In this appeal, the CA had to consider a point of principle about the proper approach to the granting of interim injunctions. When deciding whether to grant an injunction, the well-known principles set out by Lord Diplock in the American Cyanamid case will be applied. These include whether there is a serious question to be tried and whether damages would be an adequate remedy. Here this led to consideration of the impact of limitation of liability clauses when an interim injunction is sought in an attempt to prevent one party terminating the agreement. Clause 11.4 of the agreement limited the damages either party could recover and excluded certain heads of loss altogether, including loss of profit.
Mr Justice Stuart-Smith had decided that the injunction should not be granted because the damages were an adequate remedy. The commercial expectations of the parties were set by the package of rights and obligations that constituted the agreement (namely clause 11.4). 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 elements: first, liability was excluded for a number of types of loss, including “lost profits” and heads of damage; and second, there was a cap on such damages as might nevertheless be recoverable.
There was therefore a serious risk that AB’s claim for damages would be excluded or limited by it. Underhill LJ then went on to consider the 2004 case of Bath and North East Somerset DC v Mowlem plc, which was itself a decision of the CA. 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.
However, it was also submitted that this was in any event the correct position in principle. The primary obligation of the 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 on the amount recoverable) 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 indeed fail to give effect to their commercial expectations.
Underhill LJ noted that the Bath case did not decide anything to the contrary. It was indeed an unusual case, but also constituted binding authority on the point and was right in principle. There is a distinction between a claim to recover damages and a claim for an injunction which is designed to avoid any cause for a claim to such damages. The parties’ 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 is to deal with what damages a party can recover when the other is liable for a breach of contract.
However, 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 a 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 of breach, something rather different. He therefore allowed the appeal. The other two Appellate Judges agreed, providing their own short statements of principle to reinforce the point. 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?’ ”
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.”