The Court of Appeal has ruled that damage limitation clauses in a contract do not automatically prevent an interim injunction application from being successful.  Previously, it was expected that where damages are available for breach of contract, they would be considered an adequate remedy as per the American Cyanamid case regardless of any applicable damage limitation clauses in the contract, and no alternative remedy via injunction would be granted.  The Court of Appeal's decision in AB v CD (2014) calls this into question by refusing to allow the "automatic" application of the standard rule that damages are an adequate remedy in cases where there is contractual provision limiting damages at a level that is lower than what might have been awarded in law.

Background

CD owns the intellectual property rights to a platform for buying and selling goods and services, primarily in the international mining and metals market.  AB was granted a licence to market this 'eMarketplace' in the Middle East and provide the appropriate support to customers (the "Licence Agreement").  The sole income to AB's business arose from a single customer.  At the end of 2013, CD purported to terminate the Licence Agreement.  AB claimed that CD was not entitled to terminate the licence under the terms of the Licence Agreement. The Licence Agreement, which was governed by English law, contained an arbitration agreement clause; therefore, AB subsequently commenced arbitration proceedings, but in the meantime brought proceedings in the English Court seeking an interim injunction to maintain the licencestatus quo during the arbitration.

The principles of granting an injunction are well-established on the basis of the American Cyanamid case; namely whether there is a serious question to be tried, whether damages are an adequate remedy, and where the balance of convenience would lie in relation to each party's loss if the injunction is granted.

For AB, the adequacy of damages was the issue at hand.  The Licence Agreement contained a limitation clause which excluded any liability for lost profits and severely limited other damages claims.  As a result of this, AB wanted to argue that damages would not be adequate to cover their losses from termination of the licence, based on the wide approach used by the Court of Appeal in Bath and North East Somerset District Council v Mowlem (2004).  In Bath and North East Somerset, despite a liquidated damages clause in the contract at the heart of the claim, the Council was allowed to rely upon the higher level of actual loss it calculated it would suffer if no injunction was put in place.  This, AB argued, was precedent for the argument that damages with the limitation clause in place were not an adequate remedy.

However, the High Court disagreed with AB's approach.  Instead, Stuart-Smith J relied upon a narrower view in Ericsson AB v Eads Defence and Security Systems Limited (2009), which held that it was not unjust to confine a party to recovering damages if they had freely entered into a commercial contract containing a damages limitation clause.  He considered that any damages AB was entitled to recover under the Licence Agreement were adequate and so the injunction was refused. AB appealed.

Decision

The Court of Appeal allowed the appeal, confirming that AB, as an applicant for an interim injunction, could argue that damages were an inadequate remedy where the damages to cover the loss suffered were of a kind excluded by the contract.

Underhill LJ confirmed that the decision in Bath and North East Somerset was correct because it emphasised that the primary obligation of an agreement was always that the parties should perform what they have contracted to do. The expectation of lower damages being recoverable if a party breaches the agreement is a separate consideration. Not allowing the victim of a breach to require the other party to comply with their primary obligation, due to the existence of a damage limitation clause, was viewed by the Court of Appeal as being unjust.  Underhill LJ confirmed that the rule, that an injunction should not be granted where damages would be an adequate remedy, should be applied in a way which reflects the substantial justice of the situation.

Comment

Underhill LJ confirmed that Bath and North East Somerset was the appropriate authority to follow when considering damage limitation clauses in the context of interim injunction applications. As a result, this would allow AB to argue that the limited damages recoverable under the Licence Agreement would not be enough to cover the losses caused by CD's breach.

The double effect of non-recoverable losses and no possibility of an injunction to prevent further losses from a party's breach of contract was, in his view, unjust to the party applying for the injunction in the first place. Ryder LJ took this a step further, and recommended that theAmerican Cyanamid question on adequacy of damages should be reset to ask, "Is it just in all the circumstances that a claimant be confined to his remedy in damages?".

This case highlights that there may not be a straightforward answer to the question of adequacy of damages when a contractual relationship breaks down and injunctive relief is sought.  An injunction will not be automatically refused, on the basis that damages should be adequate, if a limited liability clause is present in the contract.