Impact of contractual exclusion clauses on the availability of injunctive relief

Verity Bonney, Associate, London

An injunction will not be granted if damages would be an adequate remedy. Until a recent decision of the Court of Appeal, there was uncertainty as to whether, in deciding if damages are an adequate remedy, the court can take into account a clause in the contract capping, limiting or excluding recovery of certain types of loss. The Court of Appeal has now resolved that uncertainty by confirming that a court can take into account such clauses.¹

Facts

The dispute concerned a licensing agreement and whether the respondent was entitled to terminate. Arbitration proceedings were commenced. In the interim, the appellant sought an injunction requiring the respondent to continue to perform its obligations and restraining it from terminating or suspending the agreement pending an arbitration award.

The licensing agreement included a clause under which liability was excluded for a wide range of different types of loss, including "lost profits", and then capped any damages that might nevertheless be recoverable.

The decision at first instance

The injunction was refused on the basis of previous authority, which established that, where parties to a commercial contract have agreed to exclude certain heads of loss, in considering whether an injunction should be granted, the court should ignore the fact that the innocent party may suffer loss under those heads of damage. Applying those principles to this case, the Court held that the "commercial expectations of the parties were set by the package of rights and obligations that constituted the Licensing Agreement". That package included the clause in question which was "part of the price that the Claimant [now the Appellant] agreed to pay when executing the Licensing Agreement". It was therefore not unjust to exclude the effect of the clause when considering whether or not it should be left to its remedy in damages.

However, the judge recognised that the authorities on the issue conflicted and gave permission to appeal.

The decision of the Court of Appeal

The appeal was allowed. Lord Justice Underhill delivered the leading judgment. He considered the Court to be bound by its earlier decision in Bath and North East Somerset District Council -v- Mowlem Plc² and stated that the decision in that case was also right in principle.

In Bath -v- Mowlem, Mowlem was engaged to restore the spa buildings in Bath and construct a new building alongside them. The building contract contained a provision for liquidated and ascertained damages (LADs) in the event of delay in the sum of £12,000 per week. Defects emerged during the works and there was a dispute as to whether they were Mowlem's responsibility. Delay ensued and 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 LADs represented what the parties had agreed would be an adequate remedy for delay (so that damages, would, it argued, be an adequate remedy and therefore an injunction should be denied). The Judge rejected that argument and granted the injunction; Mowlem's appeal to the Court of Appeal was dismissed.

Drawing heavily on Mance LJ's judgment in Bath -v- Mowlem, Underhill LJ stated that "the primary obligation of a party is to perform the contract". Hence the "primary commercial expectation must be that the parties will perform their obligations". The expectations created by an exclusion or limitation clause were expectations which related to a secondary obligation, namely the requirement to pay damages in the event of a breach: "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". Viewed like this, by taking the limitation/exclusion clause into account, a court would not be undermining the commercial expectations of the parties.

Comment

Until now, the "surprisingly few" authorities on this issue have been conflicting. Some courts have held that the limitation/exclusion clause should be ignored by the court (making the grant of an injunction less likely) and treated as part of the bargain/price that the party seeking the injunction is taken to have accepted. They have tended to suggest that, if the clause was taken into account, it would undermine the commercial expectations of the parties which necessarily included the limitation/exclusion clause.

The Court of Appeal firmly rejected this reasoning, calling upon principles of justice and a different interpretation of the main commercial expectations of parties to a commercial contract. As such, courts can take into account exclusion and limitation clauses in determining the availability of injunctive relief.

Please click on the links below for the other articles in the April 2014 Commercial Litigation Newsletter:

• Service: recent developments
• Brussels Regulation: which takes priority - contract or tort claim?
• Failure to respond to a request for mediation is in itself unreasonable
• Settlement: recent developments
• Changing experts: full disclosure and timely notice required
• Deciphering Part 36: the saga continues
• Litigation privilege: the dominant purpose test revisited
• Court news: CPR update and other developments
• Collective actions update: "opt-out" coming to a competition claim near you
• Reforms to judicial review: Part II

_Notes

_{¹ AB -v- CD [2014] EWCA Civ 229.}

_{² [2004] BLR 153.}