Injunctions, Limitation of Damages and True Loss

Richard Osborne considers the issues that arose in a fascinating recent High Court case, where one party sought an interim injunction to stop the other from terminating a contract

As contractual relationships break down amid claim, counter-claim and mutual recrimination, an aggrieved party will frequently try to go to Court to prevent the other from terminating the agreement between them. A recent IT case has illustrated (but not resolved) an important issue in the courts' approach to such applications.

In AB v CD [2014] EWHC 1 (QB) (the identities of the parties were removed from the judgment by agreement) the parties had entered into a licensing agreement which permitted the claimant to sell the defendant's eMarketplace trading platform in the Middle East, together with training and support. As is usually the case, the agreement contained detailed termination provisions, and CD sought to exercise its right to terminate the agreement on 180 days' notice. AB disputed its entitlement to do so and, near the end of the notice period, commenced an arbitration to resolve the issue, simultaneously applying for an interim injunction from the court to restrain the intended termination.

The injunction hearing (at which the parties were represented by SCL's own Michael Taylor and Terry Bergin respectively) came before Mr Justice Stuart-Smith on New Year's Eve. He approached the application on the basis of the well-known American Cyanamid principles, a key component of which is whether damages would be an adequate remedy for an applicant should the respondent's termination proceed and subsequently be held to have been unlawful.

AB sought to argue that damages would be an inadequate remedy. It identified that, were the termination to proceed, its business would be destroyed, and it would not be in a financial position to pursue its claim for damages in the forthcoming arbitration. The judge rejected this as a basis on which to hold that damages would be an inadequate remedy, but was caused more trouble by the fact that the agreement between AB and CD contained a clause in the following terms:

'… in no event will either party be liable to the other Party or any third party for… lost profits, … or any … indirect, special, consequential or incidental damages, under any cause of action…'

In addition to these exclusions, the clause went on to severely limit the total amount of damages which either party could recover from the other by reference to the amount earned under the agreement in the six months preceding termination.

That clause clearly had the potential severely to limit what AB could recover in damages from CD in any future action for wrongful termination. But could that weigh in the balance when such a limitation had been accepted as part of the contractual bargain? Given the importance of the issue (not least in the field of IT contracts, which almost invariably include limitations and/or exclusions of liability), the judge noted that there was limited authority on point.

One case from which he derived assistance was Bath and North East Somerset District Council v Mowlem Plc [2004] EWCA Civ 115. In that case, Mowlem was the main contractor engaged by Bath Council in relation to the restoration and regeneration of the Bath Spa complex. A dispute arose, and in due course the Council sought to bring a new contractor onto 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.

One ground on which the Council relied was that under its contract it was limited to liquidated damages of £12,000 per week, which it submitted would fall short of its actual losses caused by on-going delay to the project. 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 (including losses such as the delay in regenerating the local community which would be almost impossible to quantify). In one memorable phrase the Court of Appeal stated that a liquidated damages provision was not an 'agreed price' to permit one party to breach the agreement.

Against this were two first instance decisions: 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). In Vertex Tomlinson J stated (obiter, having already declined the injunction on other grounds) in relation to an exclusion and limitation of liability clause:

'…it is not immediately obvious to me that it would be unjust for Vertex to be confined to such remedy in damages as is determined to be the extent of the bargain which it struck.'

In Ericsson the agreement between the parties contained limitation provisions, which the Judge dealt with as follows:

'I am not satisfied that damages will not be an adequate remedy as between commercial parties in this commercial context. Both parties are in commercial terms very substantial entities. They entered into a contract which mutually prevented them from recovering most types of economic loss such as loss of profit or production… To answer the question posed by Lord Justice Sachs in the Evans Marshall case, I cannot 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.'

Attempting to apply these principles, Stuart-Smith J stated that he believed the difference in approach between the Bath and Ericsson cases to be based on a distinction between a liquidated damages provision, which has as its objective full compensation of a claimant's loss as can best be pre-estimated, and a limitation provision which seeks to remove categories of loss from the scope of recovery. To the extent that AB would receive compensation for any breach which was less than the loss actually suffered '… that is part of the price that the Claimant agreed to pay when executing the Licensing Agreement'. Accordingly he held that he was not satisfied that damages could be said to be an inadequate remedy (albeit they were likely to fall far short of the losses which would actually be suffered) and refused to grant AB an injunction.

Unusually, however, the judge added a postscript to his judgment, admitting to 'a degree of unease' with the result which he had reached. On the one hand, he could see the justice of approaching the issue on the basis that a party which freely agreed to limit its remedy in damages could not then complain that such a remedy would leave it under-compensated in order to gain an interim injunction. Furthermore he acknowledged that, given the ubiquity of exclusion and/or limitation clauses, to hold otherwise may mean that in almost every case it would be possible for an applicant to rely upon the fact that its remedy in damages would be inadequate, rendering the path to obtaining an interim injunction (which courts are generally cautious about awarding) a considerably easier one.

Against this, the Court of Appeal's approach in Bath undeniably hinted at a less restrictive approach to the issue, involving the court in safeguarding (insofar as it could) the performance of obligations under the agreement. Certainly, it is clear that in Bath the Court of Appeal was strongly against allowing a liquidated damages provision to shut-down the exercise of assessing probable damage in order to exercise its powers to prevent (as best it could) injustice to the parties.

Leave to appeal was granted, and in late January AB filed its appellant's notice. Should the appeal proceed, it will be interesting to see which way the Court of Appeal rules. Whether it confirms the broad approach adopted in Bath, the narrow approach in Ericsson or endorses the suggestion in AB v CD that the court's approach will differ depending on whether a case concerns an exclusion or liquidated damages provision, the result is likely to have a significant impact on the availability of what, in many cases, can be a crucial remedy.

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.

 

 

Published: 2014-01-23T11:51:14

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