Injunction granted to stop wrongful termination where limitation renders damages an inadequate remedy
AB v CD (CA) [2014]
This case looked at the situation where one party sought an urgent interim injunction to stop the other from wrongfully terminating a contract in circumstances where an exclusion clause would seemingly have prevented the recovery of substantial damages arising from the termination. It is established law that such an injunction will not be granted if damages would be an adequate remedy for the wrongful termination. But how does that apply in cases of an alleged breach of contract where there is a provision limiting the recoverable damages to a level below what might be suffered and which, but for the limitation, might be claimable? The High Court initially refused to grant an injunction but the Court of Appeal (CA) subsequently allowed the injunction.
Facts:
- The parties entered into a licensing agreement whereby AB was to license CD's internet-based electronic trading platform. Clause 11.4 limited the damages either party could recover to about £17,000 and excluded certain types of loss that could be claimed altogether, including loss of profit. CD served notice that it would terminate the agreement on 180 days' notice. AB disagreed that CD had the right to do this under the terms of the contract.
- AB started arbitration proceedings to resolve the dispute and at the same time applied for an injunction to restrain CD from terminating the agreement. AB submitted that if the termination went ahead, it would suffer irreparable harm as its business would be permanently destroyed and it would suffer loss of profits - damages that would be irrecoverable because of the exclusion of liability clause. It therefore wanted to obtain an injunction to prevent such losses arising in the first place as any damages it could recover would be an inadequate remedy.
Decision:
Decision in High Court:
- The High Court refused an injunction. The Court concluded that CD's argument was to be preferred. It therefore refused to grant the injunction although, quite exceptionally, it did acknowledge that there was a 'nagging doubt' about the correctness of its decision.
- The Court referred to the case of American Cyanamid Co v Ethicon Ltd [1975] which considered whether damages would be an adequate remedy if an injunction was not granted. The issue in that case principally concerned the meaning of 'adequate remedy' - it was not clear whether this phrase meant a remedy that provides (so far as money can) full compensation for what has been lost or one that is regarded as adequate by the law even though it may fall short of providing full compensation.
- In Bath and North East Somerset DC v Mowlem [2004], the contract included a liquidated damages provision but the parties disagreed on whether this would actually provide adequate compensation for on-going delays suffered by the Council. The Council seemed to have a strong case with good prospects of proving that Mowlem was acting in breach of contract. The CA upheld the injunction applied for by the Council, saying that the effect of the liquidated damages clause was that the Council would sustain damage which would not be adequately compensated.
- The Court in the Bath case went on to say that it ought to recognise that, "the assessment of the totality of any likely loss before the event is an even more rough and ready and difficult exercise than after the event; and that such an assessment may prove in the event not to give rise to adequate compensation, so that to leave a party to a claim in damages may mean that it will suffer loss which the grant of an interlocutory injunction would completely avoid". It also acknowledged that, "the agreement on liquidated and ascertained damages is not an agreed price to permit Mowlem [to breach its contract] and it does not preclude the Court granting any other relief that may be appropriate".
- This position was contrasted with the case of Vertex Data Science v Powergen [2006] where there was a limitation clause that excluded liability for loss of profit and imposed other limitations on recoverable damages. Powergen served notice on Vertex terminating their outsourcing contract. Vertex applied for an injunction on the basis that it would suffer unquantifiable loss for which an award of damages would be an inadequate remedy. The Court decided that it was inappropriate to grant injunctive relief which would have the effect of compelling the parties to work together. This decision was taken under the general heading of ‘the balance of convenience’.
- A similar issue arose in Ericsson AB v Eads Defence and Security Systems [2009] where there was also a limitation of liability clause. Ericsson argued that termination would have a seriously adverse effect on its business. Nevertheless, the judge refused an injunction as he said he could not see, "that it is unjust that a party is confined to the recovery of such damages as the contract, which it has entered into freely, permits it to recover".
- AB submitted that the Court should follow the approach in the Bath case. It contended that the fact the parties had agreed an exclusion clause should not prevent the Court from looking objectively at whether the recoverable damages would amount to full compensation. AB asserted that it would not be able to recover 'adequate damages' because its main head of claim would be for loss of profits, which were excluded by clause 11.4.
- AB's application for an injunction was refused on the basis that the commercial expectations of the parties were set by the package of rights and obligations that constituted the agreement (namely clause 11.4). Damages were therefore deemed to be an adequate remedy in the eyes of the law (albeit they were likely to fall short of the losses which AB would actually suffer).
- AB appealed.
Decision in CA:
- The CA took a different view and therefore granted the injunction. It said:
- the primary obligation of a party is to perform the contract;
- the requirement to pay damages if there is a breach of contract is a secondary obligation, and an agreement to restrict the recoverability of damages in this situation cannot be treated as an agreement to excuse performance of that primary obligation;
- it rejected the position that, even where a provision limited the injured party to damages which bore no relation to its loss, those damages had nevertheless to be regarded as an adequate remedy. That would enable a contract-breaker to be able to walk away from its obligations with impunity. This was not regarded as a just outcome. 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. It went on to say that there should not be a mechanistic application of the ‘damages are an adequate remedy’ rule to prevent the victim of a breach being able to enforce compliance with the primary obligations under the contract.
Points to note:
- The outcome of this case means that a party that restricts or excludes its liability to a significant degree now runs an additional risk that if it seeks to terminate a contract wrongfully it may be prevented from actually terminating by the grant of an interim injunction. Justice may favour the grant of an injunction to prohibit the breach in the first place. The award of an injunction is a discretionary remedy which the Courts will consider on a case by case basis.
- The CA pointed out that the impact of the decision should not be overstated: the injured party would need to show there was a substantial risk that likely damages would fall within the clause in question. In the exercise of the Court's discretion to grant an injunction, it would then wish to assess the scale of any damages shortfall and the degree of risk of those damages being incurred but it would not mean that an injunction would be granted automatically. This is something for a party to bear in mind if it is considering terminating in circumstances where it may be in breach as a result or if it is faced with a wrongful termination by the other contracting party.