AB v CD [2014] EWCA Civ 229

The English Court of Appeal decision in the case of AB v CD raised a point of principle about the proper approach to the grant of an interim injunction. It is trite law that an injunction will not be granted if damages would be an adequate remedy for the wrong, if proved. This case considers how that rule applies in cases where is a contractual clause limiting recoverable damages.

The Court of Appeal explained that 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 recoverability of damages in the event of a breach cannot be treated as an agreement to excuse performance of that primary obligation. 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.

Facts

The respondent owned the intellectual property rights in an internet-based platform for the sale and purchase of goods and services (the "eMarketplace"). The respondent granted a licence to the appellant to market the eMarketplace in the Middle East. Clause 11.4 of the licence agreement purported to exclude liability for loss of profits in the event of breach and also to cap the recoverable damages according to a prescribed formula. The respondent purported to terminate the licence. The appellant claimed that it was not entitled to do so under the terms of the licence agreement. The licence agreement contained an arbitration clause and the appellant commenced arbitration proceedings, but in the meantime, it brought the present proceedings seeking an interim injunction requiring the respondent to continue to perform its obligations under the licensing agreement and restraining the respondent from terminating the agreement pending the award in the arbitration.

In the High Court, the Judge refused relief. After finding that there was a serious issue to be tried, he considered whether damages were an adequate remedy. The Judge considered whether the fact that an award of damages would, by reason of Clause 11.4, be far less than the loss for which the appellant could otherwise recover meant that damages could not be regarded as an adequate remedy. The Judge held that the commercial expectations of the parties were set by the package of rights and obligations that constituted the licensing agreement. That package included Clause 11.4. He therefore concluded that the application should be refused because the appellant had an adequate remedy in damages.

On appeal, the only issue was whether the Judge was right to disregard the effect of Clause 11.4.

Judgment

The Court of Appeal noted that there are surprisingly few authorities directly considering the relevance of an exclusion or limitation clause to the question whether damages are  an adequate remedy. The only decision from the English Court of Appeal in this regard was Bath and North East Somerset District Council v Mowlem Plc [2004] BLR 153 ("Bath v Mow/em").

The Court of Appeal in the present case held that Bath v Mowlem 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 of a contractual clause excluding or limiting recoverable damages. Bath v Mowlem draws a distinction between two "contexts" - the first being "a claim to recover damages" and the second being "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 was conclusive in the former context but not in the latter. The Court of Appeal in the present case held that it made no difference in principle whether the restriction in question took the form of a cap on the amount of damages recoverable or of the exclusion of certain heads of loss. In both cases, the parties' agreement was concerned with what damages should be recoverable in the event of breach. Nor did the unusual facts in Bath v Mowlem affect the reasoning.

Additionally, the Court of Appeal held that the decision in Bath v Mowlem was in any event 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 recoverability of damages in the event of a breach cannot be treated as an agreement to excuse performance of that primary obligation. Primary commercial expectation must be that the parties will perform their obligations. The expectations created by an exclusion or limitation clause are expectations about what damages will be recoverable in the event of breach; but that was not the same thing.

The respondent argued that it could not be right that in every case where the victim of a threatened breach of contract sought an interim injunction he could rely on the   existence of an exclusion or limitation clause to claim that damages would not be an adequate remedy. The Court of Appeal clarified that a claimant would still have to show that if the threatened breach occurs, there was a substantial risk that he will suffer loss that would otherwise be recoverable but for which he would be prevented from recovering in full, or at all, by the provision in question. If he is able to show this, then certainly it would not be sufficient for the defendant to say that the restriction in question was agreed; and to that extent the claimant would indeed have established that his remedy in damages may not be adequate. However, that only opens the door to the exercise of the court's discretion, and in the exercise of that discretion, the fact that the restriction in question was agreed may, depending on the circumstances of the case, be a relevant consideration, as may the scale of any shortfall and the degree of risk of it occurring.

Accordingly, the Court of Appeal allowed the appeal.