AB v CD

This appeal raises a point of principle about the proper approach to the grant of an interim injunction. It is trite law that such an injunction will not be granted if damages would be an adequate remedy for the wrong, if proved: indeed the same rule applies to final injunctions. But how does that apply in cases of an alleged breach of contract where the contract contains a provision limiting the recoverable damages to below what might otherwise have been awarded as a matter of general law ?

That being the only issue, I can summarise the facts very briefly. The Respondent owns the intellectual property rights in an internet-based platform for the sale and purchase of goods and services in, primarily, the international mining and metals business: I will refer to it as the eMarketplace. It has granted a licence to the Appellant to market the eMarketplace in the Middle East. The exploitation of that licence is the Appellant’s only business, and it has at present only a single customer, though it says that its prospects for expansion are good. The Respondent has purported to terminate the licence with effect from the end of 2013. The Appellant claims that it is not entitled to do so under the terms of the Licence Agreement. The Agreement, which is governed by English law, contains an arbitration clause and the Appellant has commenced arbitration proceedings; but in the meantime on 20 December 2013 it brought the present proceedings in the Queen’s Bench Division seeking an interim injunction under section 44 of the Arbitration Act 1996 “requiring the [Respondent] to continue in all respects to perform its obligations under the Licensing Agreement … and restraining the [Respondent] from terminating or suspending the … Agreement pending the Award in the arbitration …”.

The Appellant’s application came before Stuart-Smith J on 31 December 2013. It was represented by Mr Michael Taylor; the Respondent was represented by Mr Terence Bergin. At the conclusion of the hearing the Judge announced his decision to refuse relief. He gave his reasons in a judgment handed down on 3 January 2014. He had to deal with a number of issues, but his reasoning can be sufficiently summarised for present purposes as follows.

First, he considered whether there was a serious issue to be tried. He held that there was, and since that conclusion is not challenged I need not reproduce his reasoning.

Secondly, he considered whether damages were an adequate remedy. The loss that would be suffered if the licence were withdrawn would be that the Applicant would be unable to make profits from marketing the eMarketplace, and on the face of it damages could be claimed for the loss of those profits. In his skeleton argument and oral submissions Mr Taylor argued that such a claim would not give an adequate remedy in circumstances where the likely consequence of the breach was that the Appellant would go out of business altogether and/or because it would be unable to fund the arbitration. Stuart-Smith J rejected those arguments: again, I need not give his reasons. However, in the course of his oral submissions Mr Taylor sought to rely also on the terms of a clause in the Agreement, cl. 11.4, which purported to exclude liability for loss of profits in the event of breach (or indeed of any cause of action) and also to cap the recoverable damages under any head of claim according to a prescribed formula: I set the clause out in full at para. 10 below. In fact it appears that Mr Taylor initially relied on cl. 11.4 only in connection with his argument that it would not be possible to fund the arbitration, but Stuart-Smith J considered more generally whether the fact that an award of damages would, by reason of the clause, be far less than the loss for which the Appellant could otherwise recover meant that damages could not be regarded as an adequate remedy. He reviewed several authorities which I shall have to consider below and came to the conclusion that he should follow the decision of Akenhead J in Ericsson AB v EADS Defence and Security Systems Ltd. [2009] EWHC 2598 (TCC), [2010] BLR 131. The effect of that case is that where the parties to a commercial contract have agreed that in the event of a breach damages for certain heads of loss will be irrecoverable it is right, in considering whether an injunction should be granted, to ignore the fact that the innocent party may suffer loss falling under those heads. He gave his conclusion at para. 38 of his judgment as follows:

“Applying this approach to the facts of the present case, the commercial expectations of the parties were set by the package of rights and obligations that constituted the Licensing Agreement. That package included Clause 11.4. Assuming for the sake of argument that Clause 11.4 would be effective to block any claim for loss of profits that would otherwise accrue to the Claimant after 31 December 2013 if the termination is unjustified, that is part of the price that the Claimant agreed to pay when executing the Licensing Agreement. That being so, it is not unjust to the Claimant to exclude the effect of Clause 11.4 when considering whether or not it should be left to its remedy in damages.”

The Judge concluded, accordingly, that the application should be refused because the Appellant had an adequate remedy in damages. He proceeded nevertheless to consider whether, if he had reached the opposite conclusion, the balance of convenience would have favoured the grant of an injunction. He held that it would. Again, since that conclusion is not challenged I need not set out his reasons.

Stuart-Smith J added a postscript to his judgment to the effect that although he had thought it right to follow the decision in Ericsson he believed that there was a tension between that decision and other authority to which I shall refer below and that he felt some unease at the result. He gave permission to appeal.

On the appeal before us the Appellant has been represented by Mr Roger ter Haar QC, leading Mr Taylor. The Respondent has again been represented by Mr Bergin. The only issue raised by either party is whether the Judge was right to disregard the effect of clause 11.4. It appears that if he had taken it into account he would have granted relief; and although Mr Bergin made no formal concession that if he were wrong on this issue the injunction should be granted he advanced no positive case to the contrary.

Since the application was made in connection with arbitration proceedings it was heard in private – see CPR 62.10. The Judge permitted publication of the judgment because of the wider interest of the issues raised, but he agreed that it should be reported in anonymised form because of the risk that the Appellant would suffer commercial damage if its identity were revealed. Mr ter Haar asked for that anonymity to be maintained, and Mr Bergin did not oppose that application. In the circumstances we agreed to take the same course as the Judge.

Clause 11.4 of the Agreement reads as follows:

“Except for liability resulting from breach of clause 9.2, 9.3, 9.5 and/or 9.7, or obligations arising under clause 11.1, in no event will either Party be liable to the other Party or any third Party for loss of data, lost profits, costs of procurement of substitute goods or services, or any exemplary, punitive, indirect, special, consequential or incidental damages, under any cause of action and whether or not such Party or its agents have been advised of the possibility of such damage. Except as provided in clause 11.3 and 11.6, either Party’s total liability in contract, tort, negligence or otherwise arising out of or in connection with the performance or observance of its obligations, or otherwise, in respect of this Agreement shall be limited to a sum equal to the total amount RevShare entitlement of that Party during the previous six (6) calendar months prior to the calendar month in which such damages accrued. This limitation will apply notwithstanding any failure of essential purpose of any limited remedy provided herein.”

None of the exceptions provided for is material for present purposes.

It will be seen that the clause has two elements:

Mr ter Haar did not formally concede that clause 11.4 was in fact effective or that its effect was as I have summarised it above. But he did not need to do so. It is enough for the purposes of his argument that there is a serious risk that the Appellant’s claim for damages will be excluded or limited by it.

The authorities directly considering the relevance of an exclusion or limitation clause to the question whether damages are an adequate remedy are surprisingly few. The only decision in this Court, and the one on which most of the submissions focused, is Bath and North East Somerset District Council v Mowlem Plc [2004] BLR 153 (to which I will refer as Bath v Mowlem.) I consider that case in detail below, but I should first note some more general authorities to which we were referred.

The jurisdiction to grant interlocutory injunctions derives from section 37 (1) of the Senior Courts Act 1981, which repeats the terms of predecessor provisions going back to section 25 (8) of the Judicature Act 1873, which in turn embodies the powers of the old Court of Chancery. The jurisdiction may be exercised whenever “it appears to the court to be just and convenient to do so”. We were of course referred to the guidelines about the proper approach to the exercise of that very broad discretion enunciated in the speech of Lord Diplock in American Cyanamid Co v Ethicon Ltd [1975] AC 396. I need not set out the relevant passages here, save to note that the second stage in the approach recommended by Lord Diplock is to ask whether “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”; if so, “no interlocutory injunction would normally be granted” (see p. 408 C-D). Mr ter Haar reminded us, however, of the warnings in several subsequent cases not to treat those guidelines as fettering the broad discretion conferred by section 37: he referred in particular to the observations of Lord Goff in R v Secretary of State for Transport, ex p Factortame Ltd(no 2) [1991] 1 AC 603, at p. 671 F-H.

At an only slightly lower level of generality, both counsel relied on the observation of Sachs LJ in Evans Marshall & Co. Ltd v Bertola SA [1973] 1 WLR 349, at p. 379H, that:

“The standard question in relation to the grant of an injunction, ‘Are damages an adequate remedy ?’, might perhaps, in the light of the authorities of recent years, be rewritten: ‘Is it just, in all the circumstances, that a plaintiff should be confined to his remedy in damages ?’.”

Mr ter Haar also referred us to the decision of this Court in Regent International Hotels (UK) Ltd v Pageguide Ltd (unreported, 10.5.85), though he conceded that its relevance to the issue before us is only indirect. Regent had a management contract for the Dorchester Hotel. Pageguide purported to terminate the agreement. Regent sought an injunction to prevent it from interfering with its performance of its obligations as manager. One of the issues was whether damages would be an adequate remedy for any wrongful termination. This Court upheld the Judge’s finding that they would not and – which is the point of potential significance – that in making that assessment it was legitimate to take into account not only Regent’s lost profits but the impact on its reputation and standing of losing the management of its only London hotel, which would not in itself constitute a recoverable head of damages.

I turn to the decision in Bath v Mowlem. In that case Mowlem was engaged, as part of a project funded by the Millennium Commission, to restore the old spa buildings in Bath and to construct a new building alongside. It was a major project for the city. The building contract contained a provision for liquidated and ascertained damages in the event of delay in the sum of £12,000 per week. Defects emerged in the course of the work. There was a dispute as to whether they were Mowlem’s responsibility. There was delay, at least in part as the result of that dispute. The Council engaged alternative contractors to carry out remedial works. Mowlem denied them access. The Council sought an injunction requiring Mowlem to allow them onto the site. Mowlem argued that the provision for liquidated and ascertained damages represented what the parties had agreed would be an adequate remedy for delay. The Judge rejected that argument and granted the injunction. Mowlem’s appeal to this Court was dismissed. The only substantial judgment was given by Mance LJ. I need to deal with it in some detail:

The next authority in point of time is Lauritzencool AB v Lady Navigation Inc [2005] 1 Ll Rep 260. In that case charterers sought an injunction to prevent the hirers from proceeding with the threatened withdrawal of two vessels from hire. There was an issue as to whether damages were an adequate remedy. No reliance was in fact placed on the existence of an exclusion or limitation clause, but at para. 39 (p. 270) Cooke J said:

“The decisions in Regent International and Bath v Mowlem both show that in assessing the inadequacy of damages so as to justify an injunction, the Court can take into account not only the unquantifiability of damages to be suffered and, the difficulty of assessment, but the irrecoverability of damages at law because of a liquidated damages or exception clause or because loss is suffered not by the applicant himself but by others or in some intangible way. The purpose of an interlocutory injunction is protection not just against loss which would sound in damages but against violation of any right where damages would not be adequate compensation. Loss of goodwill, loss of reputation and, in the context of a reefer pool, loss of competitiveness or marketability are all matters which can be taken into account.”

In Vertex Data Science Ltd v Powergen Retail Ltd [2006] EWHC 1340 (Comm), [2006] 2 Ll. Rep. 591, Vertex sought an interlocutory injunction preventing Powergen from terminating an outsourcing agreement under which it provided Powergen with various kinds of customer services. Tomlinson J refused the injunction on the basis that its effect would be to require the parties to continue to work together. He also, however, considered, on an explicitly obiter basis, what he described as the question of the balance of convenience. At para. 47 of his judgment he quoted the observation of Sachs LJ in Evans Marshall v Bertola which I have set out at para. 15 above, and at para. 48 he quoted a statement by Millett LJ in Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd. [1996] Ch 286, that (see p. 305):

“The equitable jurisdiction should not be exercised in a manner which would defeat the commercial expectations of the parties at the time when they entered into their contractual obligations.”

He went on to refer to the fact that the agreement between the parties excluded liability for a number of heads of damage, including loss of profit, and imposed an overall cap on damages in any event. He continued, at paras. 49-50:

“49

… [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 view of my earlier conclusion I do not need to grapple with the question what is the precise ambit and extent of the decision of the Court of Appeal in Bath and North East Somerset District Council v. Mowlem plc [2004] BLR 153. That was an extraordinary case on the facts where the contractor, Mowlem, sought indefinitely to delay completion of the high profile Millennium Bath Spa project, a project which was intended and expected to confer significant benefits upon the local economy. At paragraph 15 of his judgment Mance LJ said, in relation to that contract: -

"The agreement on liquidated and ascertained damages is not an agreed price to permit Mowlem [to breach its contract], and it does not preclude the court granting any other relief that may be appropriate."

50.

I have already concluded that other relief is not here appropriate and I do not have to decide whether the approach of the Court of Appeal in that case precludes the court from concluding in this that it is not unjust that Vertex should be confined to its remedy in damages.”

The final authority in the sequence is the Ericsson decision on which the Judge particularly relied. EADS was engaged by Ericsson to supply software and related support services. The agreement contained a provision (clause 19) very similar to that in the present case, which both excluded liability for a number of heads of loss, including loss of profit, and imposed a cap by reference to a multiple of the annual sums payable. EADS sought an injunction to prevent the wrongful termination of the agreement. It claimed that damages would not be an adequate remedy. Akenhead J in his recitation of the relevant law referred to Evans Marshall v Bertola and to Vertex, though not to Bath v Mowlem. At para. 40 (p. 140) he said:

“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. That contract contained termination clauses which could impact upon the commercial reputations of the parties. The damages which are recoverable and have not been excluded by Clause 19 are presumably not difficult to quantify; indeed it has not been argued that such damages would be difficult to quantify. I do accept that difficulties in quantification of damages can support an assertion that damages are not an adequate remedy. 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.”

The shape of the parties’ submissions – which were succinctly and cogently advanced on both sides – will be apparent from the authorities which I have set out, and I need only summarise them briefly (deferring one or two particular points to the passage where I give reasons for my conclusion).

Mr ter Haar’s primary submission was that Bath v Mowlem constituted binding authority that an applicant for an injunction was entitled to argue that damages would not be an adequate remedy for a threatened breach of contract because the recoverable damages were limited by a clause excluding or limiting liability for the kind of loss which was likely to be caused by the breach. But he also submitted that that was in any event the correct position in principle. The primary obligation of the party to a contract was to perform his contractual obligations. The obligation to pay damages in the event of breach is a secondary obligation, and an agreement to restrict the damages recoverable in that event (whether by excluding certain types of loss or imposing a cap on the amount recoverable) did not constitute an agreement that a party could walk away from his primary obligations even in circumstances where an injunction would otherwise be workable. He submitted that the governing principle should be pacta sunt servanda. He referred to the statement by Lord Wilberforce in Garden Cottage Foods Ltd v Milk Marketing Board [1984] AC 130, at p. 152 E-F, that:

“… there can be no doubt that the primary remedy against a prohibited act is an injunction against continuance of it. To allow a defendant to persist in conduct which is prohibited at the price of paying damages is something the court does not countenance.”

He also referred to a further observation of Sachs LJ in Evans Marshall v Bertola (see at p. 382H) to the effect that the grant of the injunctions sought in that case would be in the interests both of justice and of the proper conduct of commercial relations. He submitted that the passage which I have set out from the judgment in Ericsson was wrong and that Stuart-Smith J was wrong to follow it.

Mr Bergin emphasised the centrality of the rule that the court would not normally grant an injunction where damages would be an adequate remedy. He referred to the restatement of that principle in the Polaroid case mentioned in the judgment of Mance LJ in Bath v Mowlem (see para. 17 (5) above) and to observations by Buckley LJ at p. 395 (ll. 20-25). He contended that the damages with which the rule was concerned were the damages “recognised by the contract”. He submitted that for the Court to hold that damages were not an adequate remedy for a breach because the parties had agreed – in, as he emphasised, a clause that affected both parties equally – to restrict the damages recoverable would indeed fail to give effect (in Millett LJ’s phrase) to their commercial expectations. They had agreed a package of rights and obligations, including cl. 11.4: in so far as that might disadvantage either party in the event of a breach that was simply part of the price of entering into the deal. That was how it had struck both Tomlinson J in Vertex and Akenhead J in Ericsson – and indeed, despitehis expressed unease, Stuart-Smith J in the present case – and they were right. Bath v Mowlem did not decide anything to the contrary. It was, as Tomlinson J had observed, a very unusual case, and the Court had understandably been concerned by the broader damage to the public interest if the project had been delayed. Mr Bergin also pointed out that the clause in that case was a liquidated damages clause: it did not, like cl. 11.4 in the present case (and the clause in Ericsson), exclude liability altogether for the very kind of loss which the applicant would suffer from the alleged breach.

In my view Mr ter Haar is right both that Bath v Mowlem constitutes binding authority on the point which we have to decide and in any event that the Appellant’s position is right in principle. I take the two points in turn.

As for the effectof Bath v Mowlem, in my view para. 15 of the judgment of Mance LJ contains a clear statement of principle which forms part of the ratio of the decision and applies in the circumstances of the present case. In the first sentence of that paragraph he draws a distinction between two “contexts” – the first being “a claim to recover damages” and the second being “a claim for an injunction which is designed to avoid … any cause for a claim to such damages”. The effect of the rest of the paragraph is that the parties’ agreement as to the quantification of loss is conclusive in the former context but not in the latter: that is what is meant by saying that the agreement of liquidated and ascertained damages does not constitute an agreed price to permit Mowlem to breach the contract. I cannot see that it makes any difference in principle whether the restriction in question takes the form of a cap on the amount of damages recoverable or of the exclusion of certain heads of loss: in both cases the parties’ agreement is concerned with what damages should be recoverable in the event of breach. Nor do the unusual facts of the case, as adverted to by Tomlinson J in Vertex, affect the reasoning. Para. 15, as Mance LJ makes clear in the final sentence, involves a question of principle; and when he does come to consider the Council’s case based on the public interest he does so in a different part of the judgment and explicitly independently of the conclusion which he has already reached for the reasons given in paras. 14 and 15 – see para. 17 (6) above.

Mr Bergin appeared at one point in his oral submissions to be saying that the effect of cl. 11.4 was to limit the Respondent’s primary obligations under the contract: he emphasised that the operative language of the exclusion was that neither party would be “liable” for the losses in question. If that were indeed the effect of the clause, we would be in quite different territory, but the submission is unsustainable. The word “liable” is no doubt sometimes used to connote the existence of a breach or other wrong, but it can also be used to connote the recoverability or otherwise of a particular head of loss. That is plainly the way it is used in cl. 11.4. The premise of the clause is that the party is liable for a breach of contract: what it is concerned with is the damages that he can recover for that breach. For essentially the same reason I cannot accept his submission that the words “in no event” can be construed as extending the effect of the clause to the situation of a court considering the adequacy of damages in the context of a claim for injunctive relief: the subject-matter of cl. 11.4 is, and is only, what can be recovered in the event of a claim for damages.

As for why I consider that the reasoning in Bath v Mowlem is not only binding on us but, with respect, right, my reasons in truth go little further than how Mance LJ puts it in para. 15 of his judgment. 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. I share Mance LJ’s rejection of the position advanced by Mowlem that, even where a provision limited the victim of a breach to damages which bore no relation to its loss, those damages had nevertheless to be regarded an adequate remedy: see the end of para. 14 of his judgment. Mr Bergin’s stance was the same before us, as logically it had to be: even in the case of the most gross and cynical breach of contract, if – as was likely to be the case – the only losses suffered which would sound in damages were of a kind which were excluded by the contract, no injunction would lie and the contract-breaker would be able to walk away from his obligations with impunity. That does not seem to me to be just. 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.

Viewed in this way, there is no question of, as Mr Bergin contended, the commercial expectations of the parties being undermined. The primary commercial expectation must be that the parties will perform their obligations. The expectations created (indeed given contractual force) by an exclusion or limitation clause are expectations about what damages will be recoverable in the event of breach; but that is not the same thing.

This approach also seems to me to sit better with the acceptance by this Court that an injunction may in an appropriate case be granted even where the loss caused by a threatened breach would not sound in damages. That is apparent both from the Regent International case and from the judgments of Aldous and Carnwath LJJ in the Apotex case approved by Mance LJ at paras. 18 and 19 of his judgment in Bath v Mowlem. That is a separate but similar instance of the court refusing to allow a mechanistic application of the “damages an adequate remedy” rule to prevent the victim of a breach being able to enforce compliance with the primary obligations under the contract.

Mr Bergin argued that it could not be right that in every case where the victim of a threatened breach of contract sought an interim injunction he could rely on the existence of an exclusion or limitation clause to claim that damages would not be an adequate remedy. I think that that overstates the consequences of the case which I have accepted. A claimant will still have to show that if the threatened breach occurs there is (at least) a substantial risk that he will suffer loss that would otherwise be recoverable but for which he will (or at least may) be prevented from recovering in full, or at all, by the provision in question. If he does, then certainly it will not be sufficient for the defendant to say that the restriction in question was agreed; and to that extent the claimant will indeed have established that his remedy in damages may not be adequate. But that only opens the door to the exercise of the court’s discretion; and in the exercise of that discretion the fact that the restriction in question was agreed may, depending on the circumstances of the case, be a relevant consideration – as may the scale of any shortfall and the degree of risk of it occurring. Mr ter Haar made it clear that he did not contend to the contrary.

I would accordingly allow the appeal. If my Lords agree with that outcome, I would hope that the parties can agree the details of the terms of the injunction to be granted; if not, I would expect that we would be able to resolve any difference on the basis of written submissions.

I agree and for the reasons given by Underhill LJ, I would also allow the appeal. In particular, I would wish to emphasise the expression of principle set out by my Lord at [25]. On the facts of this case the court's remedies are available in support of a contractual right and are not excluded by the terms of the contract. Injunctive relief is a remedy available to the court to give effect to commercial expectations where it is in the interests of justice that agreed obligations should continue to be binding on the parties, whether that be for an interim period or the term of the contract. The construction of the contract clause in the context of the description of legal principle set out by my Lord has the effect of tending to support rather than undermine parties who have entered or seek to enter into a contract which contains their commercial expectations. There are different reasons on the facts of individual cases why this may be so and although it would be unwise to categorise them, it is surely the policy of the law to help to give effect to the parties' intentions and in particular their acceptance of commercial risk by performance. For that reason, 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.

I agree with both judgments.  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.