Interim Injunctions and Limitation of Damages: Court of Appeal View

March 11, 2014

In January I wrote an article concerning the decision of Mr Justice Stuart-Smith in the case of AB v CD [2014] EWHC 1 (QB). The primary issue raised by the judgment was whether a party applying for an injunction to restrain the other from breaching (in this case, terminating) a contract was able to rely upon the fact that damages would be an inadequate remedy in its favour, even though it had agreed damages of the relevant sort would be limited or irrecoverable altogether pursuant to a limitation or exclusion clause. 

The point is an interesting one, and many people since I wrote that original article have expressed firm views in both directions. The arguments on both sides were emphasised by the unusual fact that Stuart-Smith J himself, in a codicil to his judgment, expressed unease in ruling that it was not open to a party to rely on the fact that damages would be an inadequate remedy if it had agreed to be bound by the clause which created that inadequacy as part of the underlying contractual bargain.

The Court of Appeal has now delivered its judgment ([2014] EWCA Civ 229), overturning the decision of Stuart-Smith J and holding that the existence of such a limitation clause cannot fetter a court’s determination of whether damages will be adequate if a breach occurs. In doing so, it appears to have determined that previous first instance decisions in the other direction (Vertex Data Science Ltd v Powergen Retail Ltd [2006] EWHC 1340 (Comm) and Ericsson AB v Eads Defence and Security Systems Ltd [2009] EWHC 2598 (TCC)) were incorrect on this point.  The touchstone of the decision was a previous decision of the Court of Appeal: Bath and North East Somerset District Council v Mowlem Plc [2004] EWCA Civ 115. There, Mowlem was the main contractor engaged by Bath Council in relation to the restoration and regeneration of the Bath Spa complex. When a dispute arose, the Council sought to bring a new contractor on to site to carry out some of the works. Mowlem refused access, and the Council sought an injunction to force it to allow the new contractor on site.

The Council relied upon the fact that under its contract it was limited to liquidated damages of £12,000 per week, which would fall short of its actual losses caused by on-going delay to the project (including damage to the broader community). Mowlem argued that such an argument was not available in circumstances where the parties had expressly agreed in their contract that the liquidated damages did amount to adequate compensation. The Court of Appeal rejected Mowlem’s suggestion, holding that a liquidated damages clause would always be a rough and ready pre-estimate of loss and that the Court should not shut its eyes to the fact that loss in excess of such pre-estimate would be suffered unless avoided by the grant of an injunction. In one memorable phrase the Court stated that a liquidated damages provision was not an ‘agreed price’ to permit one party to breach the agreement.

Delivering the leading judgment in the instant appeal, Lord Justice Underhill held that Mowlem articulated a binding principle which was sufficient to allow AB’s appeal. The principle was essentially that a limitation clause was one which applied upon a claim for damages: it would be impermissible to allow it to effectively dictate the availability of an interim injunction to restrain a breach, as this was not part of the agreement of the parties. Lord Justice Underhill also emphasised (as had the Court of Appeal in Mowlem) the injustice of allowing the fact that the parties had agreed to limit remedies for breach of contract to fetter the Court’s role in ensuring that contracts were performed in the first place. To allow otherwise, he held, would be to prevent the Court from intervening even in the face of the most cynical breach of contract where the contract-breaker would have the protection of an exclusion clause. In such a situation the Court should be free to intervene to protect the contractual bargain. As to CD’s submission that this would subvert the commercial agreement of the parties by allowing into the reckoning types of damages which they had agreed to exclude, Lord Justice Underhill countered that the primary expectation was that the contract would be performed, and the Court must protect that expectation: the agreement as to what damages would be available for breach was a separate issue. Lord Ryder stated that he believed the familiar question ‘would damages be an adequate remedy’ should be re-cast as ‘Is it just in all the circumstances that a claimant be confined to his remedy in damages?’.

Perhaps of most immediate interest to practitioners is an issue tackled only briefly by the Court: what is the impact of this decision on the availability of interim injunctions generally? It was a part of CD’s submissions that to decide as the Court ultimately did would be to expand the availability of interim injunctions, as it would allow an applicant in any case where there was an exclusion or limitation clause (which, in the field of IT contracts, is likely to be almost all of them) to rely upon that clause in establishing that damages would be an inadequate remedy. Lord Justice Underhill emphasised that the impact of the decision should not be overstated: an applicant would need to demonstrate a substantial risk that likely damages would fall within the clause in question, and the Court would wish to assess the scale of any shortfall and the risk of it occurring. Even then, this would only open the door to the Court’s exercise of its discretion – it would not mean that an injunction would automatically be granted.

These limitations are undoubtedly true, but on the facts of most cases seem unlikely to create significant limitations on an applicant’s ability to rely on the existence of a limitation clause in support of his application for an injunction. Tackling the issue directly, Lord Justice Laws stated: ‘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.’ [emphasis added]. With those words ringing in their ears (and subject to any further appeal to the Supreme Court) it seems that applicants for interim injunctions will in many cases have had their positions significantly strengthened by this decision.  

Richard Osborne is a barrister at 4 Pump Court.  He has a general commercial practice, with particular experience in Information Technology, Insurance, Commercial, Professional Negligence, Construction and Common law.  He is also a member of the SCL London committee.