High Court finds damages not an inadequate remedy due to contractual limitation clause and refuses interim injunction

The High Court has refused to grant an interim injunction, holding on the basis of prior authority that a limitation clause excluding certain heads of liability did not mean that damages would be an inadequate remedy: AB v CD [2014] EWHC 1 (QB).

However, the judge (Stuart-Smith J) admitted a "degree of unease at the result" and a concern that his approach may be "too inflexible in a case such as the present". He therefore granted permission to appeal. Neil Blake and Anna Bond consider the decision further below.

	Neil Blake Senior Associate +44 20 7466 2755

Background

The defendant, as owner of intellectual property in an eMarketplace, licensed to the claimant the right to market the eMarketplace, to sell eMarketplace solutions to third parties and to supply them with training and support. The defendant notified the claimant that it intended to exercise a contractual right to terminate the licensing agreement. The claimant commenced arbitral proceedings and applied for an injunction to restrain the defendant from terminating the agreement pending determination of the arbitration.

The well-known considerations for a court exercising its discretion to grant an interim injunction are set out in American Cyanamid Co v Ethicon Ltd [1975] AC 396: (1) whether there is a serious issue to be tried; (2) whether damages would be an adequate remedy; and (3) where the balance of convenience lies. 

Here the claimant argued that damages would not be an adequate remedy, including because the claimant's recoverable damages would (or may) be limited by a contractual limitation clause at 11.4 of the licensing agreement. This provided:

"… in no event will either Party be liable … for … lost profits, … or any … indirect, special, consequential or incidental damages, under any cause of action. … either Party's total liability in contract, tort, negligence or otherwise … in respect of this Agreement shall be limited to a sum equal to the total amount of RevShare entitlement of that Party during the previous six (6) calendar months prior to the calendar month in which such damages accrued."

The defendant's position was that it would seek to rely on this clause if it were open to it to do so. It was therefore at least possible that any damages ultimately recoverable by the claimant in the arbitration would be less than would fully compensate it for the losses arising from the Defendant's (alleged) wrongful termination of the licensing agreement.

Decision

Stuart-Smith J refused to grant an injunction, finding that the claimant was not able to show that damages were an inadequate remedy.

The judge noted a "latent ambiguity" in this element of the test from American Cyanamid: it is not clear whether the phrase "adequate remedy" means, on the one hand, a remedy that provides (so far as money can) full compensation for what has been lost or, on the other, a remedy that is regarded as adequate by the law even though it may fall short of providing full compensation.

The judge noted a "surprising lack of authority", given that parties seeking injunctions must often be doing so in circumstances where there is a contractual restriction on the quantum of recoverable damages.

The judge considered various cases including the Court of Appeal decision in Bath and Northeast Somerset DC v Mowlem PLC [2004] EWCA Civ 115. There, a contract between the claimant council and a contractor provided for liquidated damages at £12,000 per week. At first instance it was held that the liquidated damages clause would have the effect of limiting damages to less than would adequately compensate the claimant council and on that basis the court granted an injunction. This decision was upheld by the Court of Appeal, which noted that "Mowlem is not entitled to breach its contract" and the agreed liquidated damages figure was not "an agreed price to permit Mowlem to do so" and did not preclude the court granting any other appropriate relief. The court noted the higher level of actual loss that might accrue to the council but for the grant of an injunction and the wider damage to the public interest that might also be caused by delay in the completion of the project concerned (the redevelopment of the Bath Spa).

In the present case the judge contrasted the decision in Bath with those in 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) where no injunctions were granted (albeit in Vertex on grounds other than the adequacy of damages). What differentiated these cases from Bath was that, instead of a liquidated damages clause, the relevant contracts contained limitation clauses which excluded certain heads of loss altogether. In these cases the court was unwilling to hold that it was unjust to hold a party to the limited remedy in damages that it had agreed.

The claimant in AB v CD proposed that the two kinds of clauses should be treated in the same way: the fact that the parties have agreed a limit on the available damages should not prevent the court from assessing objectively whether the recoverable damages amount to full compensation for the claimant.  By implication, it was the claimant's position that Ericsson was wrongly decided and should have followed Bath.

However, Stuart-Smith J found that there was a fundamental difference between a liquidated damages clause seeking to pre-estimate and compensate the full extent of a party's losses on breach, and a clause stating that certain heads of loss would not be compensated. The former evinces a contractual intention of full compensation, while the latter does not.

The court held that clause 11.4 was "part of the price that the Claimant agreed to pay when executing the Licensing Agreement" and, accordingly, it was not unjust to exclude its potential effect when considering whether the claimant should be left to its remedy in damages.

As noted above, however, the judge expressed concern as to whether the approach adopted was too inflexible.  The judge acknowledged the force of the argument that the parties' commercial expectations were set by the bargain they had made, and so a party should have no cause to complain if its claim for damages was reduced by an agreed limitation clause. However, he said, Bath suggested that the equitable jurisdiction has a more fundamental objective, that of avoiding further financial loss and any cause to claim damages. He also noted that in Bath the Court of Appeal objected to treating the contract entered into by the parties as setting a price for a party's breach. He therefore granted permission to appeal.

Note: The Court of Appeal has reversed the High Court’s decision – see AB v CD [2014] EWCA Civ 229 and our blog post on the appeal decision here.