Where a supplier’s breach of contract could make you breach your own contracts and potentially become insolvent, you might reasonably hope to convince a court to stop the supplier acting until after you have obtained a ruling on the breach. However, in January this year, the high court in AB v CD (3 Jan 2014) refused to grant an injunction in such circumstances on the basis that compensation payments (to the insolvency practitioner) would be an adequate alternative remedy.

That appeared harsh. An innocent party was left to watch their business go to the wall on the basis that the subsequent liquidator would have a claim, which itself was capped by limitation of liability clauses. Happily the Court of Appeal has now overturned it CofA AB v CD (6 March 2014).

The claimant (AB) was providing a support and maintenance service for an internet based purchasing product to its only client (X). CD owned the licence for the internet based product and notified AB that it intended to terminate that licence. AB argued that it would go out of business if CD did so as it could no longer fulfil its only contract. It issued an application for an interim injunction to prevent termination pending the decision in an arbitration on whether termination was permitted. The licence contained a provision to limit liability for breach.

The high court judge was convinced that there was a serious issue to be tried and that the balance of convenience lay in favour of granting an injunction due to the serious effect on AB’s business. However, he decided that financial compensation was in fact an adequate remedy for AB and hence rejected an injunction.

The Court of Appeal took the opposite view:

  • There is a primary duty to comply with a contract. An injunction is, in principle, available to enforce such compliance.
  • An injunction would not be ordered where damages would be an adequate remedy.
  • However, where the amount of damages was capped by contractual terms at a sum significantly lower than the actual loss suffered (here – losses sufficient to make the company insolvent) this may well mean that damages will not be adequate.

Agreeing that the balance of convenience lay in granting an injunction until the claim could be heard (i.e. to avoid the need for the company to go insolvent) the Court of Appeal consequently allowed the injunction.

The emerging lessons for contracting parties are as follows:

  • Even where the forum is arbitration, it is often possible to get the courts to issue an interim injunction to hold the ring (although some standard arbitration rules exclude this right).
  • A limitations on liability in a contract is relevant to considering the adequacy of damages and consequently this is another matter to consider when drafting such clauses.
  • A limitation on liability to a sum significantly less than the actual likely losses may make an injunction against alleged breach more likely.

This appears to be a more comfortable outcome than the original first instance decision and is a reminder to those drafting limitation clauses about one of the potential unanticipated consequences of doing so.