Over the limit

Tuesday 9 September 2014

The granting of an injunction is a matter at the discretion of the Court, who will consider whether there is a serious question to be tried; whether damages would be an adequate remedy; the balance of convenience between the parties; and whether the status quo should be maintained. Where the parties to a contract have agreed limits on liability in the event of a breach, that will not necessarily prevent an argument that damages would not be an adequate remedy and that an injunction should nevertheless be granted.

The case of AB –v- CD concerned an Application under the Arbitration Act 1996 for an injunction preventing the termination of a licensing agreement relating to the provision of an internet based service for buying and selling goods. The licensor had given notice to terminate the agreement and the licensee had made a request for arbitration as they did not accept there was any entitlement to terminate. Further, the licensee would be forced to cease trading as a result of the termination because the licensor was its sole customer and source of income.

The licensee argued that an injunction was required because if it was subsequently decided at the arbitration that the licensor had wrongfully terminated the agreement, then damages would not be an adequate remedy. This was on the basis that the agreement contained an exclusion clause which detailed the damages recoverable in the event of a breach of contract and excluded certain heads of loss in their entirety (most notably a claim for loss of profits).

The licensor argued that the parties had agreed the damages which would be recoverable and if it was held that this was an inadequate remedy, that would fail to give effect to the parties’ commercial intentions.

The High Court refused the application for an injunction on the basis that the commercial expectations of the parties as set out in the contract should be upheld. If it had been the parties’ intention that certain heads of damage should not be compensated then that should not be interfered with.

However, the Court of Appeal refused to uphold this “mechanistic” approach which would prevent the victim of a contractual breach from obtaining injunctive relief to enforce compliance with the obligations under a contract.

The Court of Appeal found that a limitation or liquidated damages clause would be upheld, but that this did not constitute an agreed price to permit a party to breach a contract by not performing its contractual obligations. It remains open to the Court to use other remedies, such as an injunction, to compel a party to perform its obligations.

This case highlights the importance of carefully drafted limitation of liability clauses. Parties to a contract should carefully consider any exclusions, particularly those relating to wrongful contract terminations.

It is also important to bear in mind that whilst an exclusion clause can operate to reduce a party’s exposure to a damages claim, this will not prevent the Court from granting an injunction requiring a party to continue to comply with the terms of a contract against its will.