The English Court of Appeal has issued a recent judgement[1] that may assist future applicants for an interim injunction (a court order prior to judgement) to restrain breach of a contract. The judgement appears to clarify an issue that has arisen where the contract concerned includes provision limiting or excluding the liability of an offending party to pay damages.
The legal basis for granting injunctions
The jurisdiction of the court to grant an interim injunction is set out in s.37(1) of the Supreme Court Act 1981. The court also has jurisdiction to grant an interim injunction in support of an arbitration as stated in s 44 of the Arbitration Act 1996.
Guidelines as to when interim injunctions may be granted
The House of Lords (the predecessor of the Supreme Court) in a 1975 judgement[2] indicated that interim injunctions would only be granted where:
- There is a serious issue to be tried.
- The injured party would not be adequately compensated by an award of damages alone.
- The balance of convenience favoured granting an injunction.
In respect of the second condition the court stated:
“….. the governing principle is that the court should first consider whether, if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant’s continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be [an] adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s claim appeared to be at that stage”.
The issue – whether limitation to the recoverable damages impacts on the grant of an injunction.
The issue that has arisen in recent years is whether damages for breach of contract subject to agreed limitation or exclusion clauses were to be considered as an adequate remedy and that as a result no interim injunction should be granted to restrain breach of the contract.
Two conflicting approaches had been adopted by the courts. One approach in the Court of Appeal has been to reject the idea that limitation on damages should be a considered an adequate remedy for the purposes of considering an application for an injunction. In the words of one judge[3]
“The agreement on liquidated and ascertained damages is not an agreed price to permit [the Defendant to breach its contract], and it does not preclude the court granting any other relief that may be appropriate.”
An alternative position adopted in two High Court judgements is that the limitations were agreed by the parties and any resulting damages should be considered as adequate and thus no injunction should be granted[4]. It is this latter line of reasoning that has constituted a potential obstacle to any party to a contract seeking an interim injunction to restrain breach of that contract.
The latest decision – AB v CD [2014]
The Court of Appeal has now given a judgement[5] that may provide a firmer answer to this issue unless and until it goes before the Supreme Court.
That case concerned a licence of intellectual property rights in an internet-based platform for the sale and purchase of goods and services. The licensor purported to terminate the Licence Agreement. The licensee claimed that the licensor was not entitled to do so under the terms of the Licence Agreement and commenced arbitration proceedings. It also applied to court for an interim injunction under section 44 of the Arbitration Act 1996 requiring the licensor to continue in to perform its obligations under the Licensing Agreement pending the Award in the arbitration.
The Licensor opposed the grant of an injunction. It argued that damages were an adequate remedy and sought to rely also on the terms of a clause in the Licence Agreement which purported to exclude liability for loss of profits in the event of breach and to cap the recoverable damages.
The Court of Appeal rejected the idea that damages subject to limitation or exclusion should be considered as adequate in the context of this application and that an injunction should not be granted as a result.
The court stated:
“The primary obligation of a party is to perform the contract. The requirement to pay damages in the event of a 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”.
The rule – if “rule” is the right word – 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: that is, after all, the basis of the jurisdiction under section 37.
Interestingly the court appeared to see the limitation of the right to recover damages as a factor that might favour the grant of an injunction:
“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”.
The court also appeared to move away from reference to the adequacy of damages to an alternative expression of the test:
“ … I favour re-casting the question to be asked on an application for injunctive relief, which is: “Is it just in all the circumstances that a [claimant] be confined to his remedy in damages?” per Sachs LJ in Evans Marshall & Co Ltd v Bertola SA [1973] 1 WLR 349 @ 379H”.
This result should assist future applicants for injunctions restraining breaches of contract.
[1] AB v CD ([2014] EWCA Civ 229)
[2] American Cyanamid Co. v. Ethicon Ltd. [1975] AC 396
[3] Bath and North East Somerset District Council v Mowlem Plc [2004] EWCA Civ 115
[4] 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)
[5] AB v CD as above
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